What’s A Pension Drawdown?

Pension Drawdown: What it is and How It Works

Wouldn’t it be fantastic if you retired from your 9 to 5 advertising job and had enough capital and investments to help you start your advertising agency? With fitness centres and health experts thriving thanks to the need for people to live healthier lives, today, more and more people are living up to throw their 60th and 75th birthday parties. Nevertheless, with the financial strains being experienced in every corner of the world, retiring without a solid financial plan can send you into the abyss of depression. It’s said that almost 10% of retirees in the 21st Century end up in the streets or home shelters due to lack of proper financial planning in retirement. That said, you don’t have to wait till you clock into your 40s to start saving for retirement. You have to start as early as the 20s to have a considerable amount when you strut into your sunset years. There are innumerable investment options you can make, but one of the best and most flexible options is the drawdown pension1. With that, here’s a detailed guide into pension drawdowns, and how they work.
What’s A Pension Drawdown

Pension Drawdowns Explained

Income drawdowns or the drawdown pension enables you to draw down on your pension savings, without having access to all of your funds in one lump sum. Any capital you don’t draw down remains invested, thus offering you the chance to increase your pension after you retire into the sunset.

You’re in a never ending battle.

It differs from an annuity since your income isn’t assured, and the size of your pension fund can both increase or decrease, based on how the investments perform.

Pension Drawdown Rules You Need to Know

Pension Drawdown Rules You Need to Know

Typically, all the current income drawdown schemes set up after 6th April 2015 are referred to as ‘Flexi-access drawdowns.’

Flexi-Access Pension Drawdown

Under this pension scheme, you’re permitted to take up to 25% of your retirement income tax-free, upfront. You aren’t subjected to any limits on the amount of pension savings you can draw down from the remaining retirement income. Therefore, you can choose to:

  • Take out the amount in one go
  • Take monthly or yearly payments, or opt for several small lump-sum payments whenever you need them 

If you, however, took out an income drawdown scheme before 6th April 2015, there were two forms of drawdown options:

Capped Drawdowns

The capped drawdown option is limited on the amount you can withdraw from your pension plan, in line with the regulations set by the government. The maximum amount you’d take with this is 150% of the amount you’d have received every year with an annuity1.

Flexible Drawdowns

Flexible drawdowns enabled you to withdraw as much capital as you’d want every year. To qualify for this scheme, you needed to be getting a pension income of about €12,000 each year from various sources.

Now:

If you don’t know which pension drawdown option is best, be sure to consider taking drawdown pension advice from an independent financial advisor.

Pension Drawdown Benefits

Pension Drawdown Benefits

Like most financial options, pension drawdowns offer you numerous benefits which include:

  • Pension drawdowns are flexible. You have the freedom to choose when you can take an income amount and also purchase an annuity, or an alternative retirement plan with your savings.
  • You have the chance to continue investing your cash, and if you select the best option, your plan can grow in leaps and bounds
  • You can continue optimizing your retirement benefits, especially if you don’t necessarily need a fixed monthly income
  • You have the right to dip in and withdraw your capital as you please. You can also increase or reduce the amount you take out every year
  • Income drawdowns also allow you to manage your tax liability. For instance, you can adjust your income in a specific year to suit your circumstances
  • You have the right to keep your options open and purchase an annuity  later on
  • You can transfer your savings to your family

Income Drawdown Drawbacks

Pension drawdowns aren’t right for everyone. They feature various drawbacks which include:

  • There’s no guaranteed annual income
  • It’s not the best option if you’re anxious about running out of capital
  • You can be subjected to high drawdown charges
  • All investments come with their plate of risks. Therefore, if you don’t marvel at risk-taking, this might not be your ideal option
What Are the Pension Drawdown Tax Rates of 2020

What Are the Pension Drawdown Tax Rates of 2020?

You’ll receive an initial 25% off your pension savings tax-free. From there, since your pension savings will be considered as income, you’ll be taxed as per the income tax structure of that year. It means that in Wales, England, and Northern Ireland:

  • The first €12,500 won’t be taxed2 (unless you have income from other sources)
  • You’ll pay a 20% tax on €37,500 after the first withdraw
  • You’ll then pay a 40% on any amount above €50,000
  • You’ll pay a 45% tax charge on amounts above €150,000

If you want to see how much you’ll be charged or can withdraw, you can use the drawdown pension calculator or income drawdown tax calculator.

Pension Drawdown Scheme When One Dies

What Happens to the Pension Drawdown Scheme When One Dies?

Well, the amount of income tax retirees used to pay on drawdown pension after death was cut. However, it used to be 55% – that’s relatively high. Right?

Well, lucky for you, the UK government cut this amount.

I’ll show you how,

If you die under 75 years :

Every pension pot left by a pension plan holder who passed on under the age of 75 will be inherited tax-free. Your heirs can take it either as a monthly income or as a one-off payment.

If you die over 75 years:

If you die when you’re aged 76, your beneficiaries will be subjected to pay tax at the marginal rate of income tax, whether they choose to take the remaining capital as a lump sum amount or monthly income.

Here’s the kicker:

Another refreshing change is that the death benefits are now left to anyone you want, and not exclusively to dependents like your spouse or civil partner. That makes it essential to complete your pension provider’s expression of wish form’, thus declaring who needs to inherit from your pension fund.

Got Questions? Check These First

How Much Does A Drawdown Pension Cost?

What Are the Alternatives to A Pension Drawdown Scheme?

Is a Pension Drawdown Better Than An Annuity?

What’s the Best Pension Drawdown?

In conclusion

And that was only the beginning:

If you’re thinking about drawing down on your pension, it’s essential to understand what that means. In this blog post, we’ve explored some of the benefits and drawbacks of withdrawing money from your company retirement plan before age 65.

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