What is Pension Drawdown?
If you have a defined contribution pension scheme, you will know that your pension has been built up over time dependent on the payments you / your employer have contributed to over time. The amount in the pension not only depends on the amount contributed to, but the performance of the investments within the pension. Pension drawdown is effectively one option of taking money from your pension pot as income, and leaving part invested. Other names for this can be known as income drawdown or income withdrawal. The basic qualifying rules are:
- You must be aged 55 or over
- You have a defined contribution scheme in place
What are the rules for pension drawdown?
The main influencer on pension drawdown was the Pension Freedoms. The rules were changed to effectively give people greater flexibility to accessing their pension savings at retirement. Prior to these rules, individuals had to purchase an annuity, which was argued to be advantageous in some areas, but not favorable in terms of choice and flexibility. The table below outlines some of the new the options available:
|Pre 6 April 2015||Post 6 April 2015|
|Purchase an Annuity – Providing a fixed and guaranteed income for life||
Schemes set up after the 6 April 2015 are known as ‘Flexi access drawdown’. With this option you can:
- Take up to 25% of the pension savings tax free in one go, upfront
- Withdrawn all of it in one go
- Take regular monthly, or annual payments
- Take a series of lump-sums on an ad-hoc basis
Schemes set up before the 6 April 2015 are known as ‘capped and flexible drawdown’. With these options you can:
- Capped drawdown: the rules set out are strict and outlined by the government which stated
- There is a limit to how much you can draw
- The maximum you could take is 150% of the annualised income if you had bought an annuity
- Flexible drawdown:
- This allowed individuals to take as much money out each year
- To qualify, you needed to be receiving at least £12,000 a year from pension income outside of the pension in question
5 Tips on Pension drawdown
Tip 1: Is pension drawdown right for me?
Drawdown may suit some people more than others, but the big considerations for drawdown are illustrated in the table below:
|May be Worth considering if you:||May not be worth considering if you:|
Tip 2: What charges to expect?
Pension Drawdown is not free. Comparing costs for drawdown can be complex as providers have different charging structures, and you may find that there are between 1-8 separate types of fees depending on the providers that you opt into for pension drawdown. These can include:
- Set up fees
- Annual administration charges
- Dealing and trade charges
- Platform fee
- Adviser charge
- Withdrawal fee
- Converting your pot into an annuity
- Exit fees / penalties
Tip 3: What are the tax implications of pension drawdown?
Tax Whilst Alive
The first 25% you take from your pension pot is completely tax free.
Let’s assume you need to make withdrawals, the subsequent withdrawals made are subject to income tax. For the purposes of this, we are using the income tax rates of 2019/2020 in England, Wales and Northern Ireland (tax in Scotland is different and does not apply to this example):
Raj is 55 and retired. He opts for income drawdown on his £500,000 pension. He has no income from anywhere else. He wants to take his 25% tax free lump sum and on top of this, he wants another £32,500 from his pension. The calculation is as follows:
- 25% tax free = £125,000
The further £32,500 is taxed as follows:
- £12,500 is then tax free (as he has no income from anywhere else that tax year)
- 20% tax is then paid on the remaining £20,000
Total Tax to be paid = £4,000
Tax at Death
Previously, if you passed away, the amount of tax used to be 55% on your remaining pension. This has changed and can be split into two key areas:
|Death Under 75||Death Over 75|
If you are already in pension drawdown, the rules slightly differ. Your pension will convert to flexi-access-drawdown from 6 April 2015.
Tip 4: What restrictions to expect?
Every year, the taxman allows you to contribute a maximum (that is if you are eligible based on earnings) of £40,000. Once you enter a drawdown arrangement, the rules change.
Once you take more than 25% tax free lump sum, the annual amount you can then contribute drops to £4,000 regardless of earnings. This is known as the; Money Purchase Annual Amount (MPAA).
Don’t get confused. This rule doesn’t apply if you are already in a capped drawdown plan. If you are remaining in capped drawdown, you can continue to contribute £40,000 a year into your pension pot.
The value of Investments is not guaranteed and can fall as well as rise and you may not retain the amount you originally invested.
If you drawdown too much Income or your investments underperform, you run the risk of running out of funds.
The value of pensions and the income they produce can fall as well as rise, you may get back less than you invested.
The Financial Conduct Authority do not regulate inheritance tax planning and trusts.
Both Black Lion Insurance & Black Lion Wealth are Trading Styles of PRG Protect Ltd
What are my other options?
Income drawdown is a popular way of accessing income from your pension, but there are other options to consider:
- Purchasing an Annuity;
An annuity effectively means you use your pension savings to buy a guaranteed income for the rest of your life. You can use part of your pension pot to buy an annuity while leaving the rest in drawdown, or you can do one or the other.
- Uncrystallised Funds Pension Lump Sums (UFPLS);
in simple terms, this is another way to take money out of your pension pot without opening an income drawdown plan. This is by taking ad-hoc withdrawals from your pension. You can take your whole pension pot in one go, or a series of smaller lump sums as an when you want. If you decide to access your pension this way, the first 25% of your withdrawal is tax free, whereby the next 75% is subject to income tax.
Why speak to us – Our client charter?
We love what we do, and more importantly, we are qualified to do it – we aim to provide a fully comprehensive service to all our clients.
- We are confident that we will deliver a high-quality service that will be amongst the best in the financial services industry
- We continually strive to improve our personal development
- We follow the principles of treating customers fairly set out by the Financial Conduct Authority
- We treat our clients as we would like to be treated.
Our 4-step approach to financial planning:
We Understand YOU
- By gathering information from you, we always find out about any plans you already have in place
- We explore your attitude to risk and return, your goals and objectives, and build a picture of what you want to achieve
- At this stage you find out what to expect from us
- We do not charge you a fee at this stage
We Plan for YOU
- We’ll go away and research various scenarios and how to make the most out of your existing arrangements
- We’ll then recommend how you can build on your existing plans, so you have the right chance of achieving your goals
We Implement for YOU
- We do all the heavy lifting on your behalf – like what we do for all our other clients. This saves you time and effort.
We Refine YOUR plans
- Nothing stands still. We will sense check the progress of your plans regularly, we suggest this is done once a year
- We will update you on legislation, taxation or you will update us on changes to your circumstances
What our clients are saying
Black Lion insurance were great in helping me get through the countless jargon and pitfalls when it comes to setting up insurance. I was thankfully recommended to them by a colleague and they made the process seamless ensuring I have the most appropriate policy for me
I’m an IT contractor and I wasn’t sure if I was eligible for this cover, however, to my delight, not only could I have the cover, but I could pay it through my Ltd company. I was covered within an hour of getting in contact. Very prompt and informative service!
Polite and very clear when explaining my product of interest. Happy to answer any questions and recap on areas that I wanted to ensure I understood clearly before committing. Didn’t feel pressured or rushed at any point and the chap was very pleasant.
Get in touch
We are a dedicated team of financial advisers, with years of experience in guiding our clients to a solution that meets their specific needs. We specialise in helping both employed and self employed individuals, as well as business owners on a variety of solutions, which range from life insurance, income protection insurance, keyman insurance and shareholder protection insurance.
The guidance and/or information contained within this website is subject to the UK regulatory regime, and is therefore targeted at consumers based in the UK