Wondering what you’ll do when you retire? Income drawdown might be the way to go!
Income drawdown is an option for you to use your pension when you want to retire. Meaning, you leave your pension invested, and you cash in when needed. It’s the most popular alternative to buying an annuity.
What Are My Retirement Options?
A defined contribution pension opens up a variety of things you can do with your pension pot when you choose to retire:
- A lump sum of up to 25% can be cashed in without tax. An amount larger than this will be taxed.
- Buying an annuity is another option with the rest of your pension funds. A guarantees an income for a specific period.
- Otherwise, moving your funds into income drawdown is also a good option. Your pension funds will still be invested, and you can cash in taxable income.
How Does Income Drawdown Work?
Income drawdown1 funds get invested in multiple shares like cash and bonds. You can cash in money from the fund for your retirement.
All new income drawdown product is now ‘Flexi-access drawdown’ since April. This means that you can decide on the amount of money to cash in annually. However, you’ll have to pay income tax (after your first 25% tax-free withdrawal).
The Pros & Cons Of Income Drawdown
Pros and cons to income drawdown2 are a given.
Pro: it’s flexible. You can cash in a retirement income whenever you choose to. Better yet, if markets are buoyant, it will increase the value of your pension pot. Income drawdown is also amazing if annuity values are low. Plus, if you die before the age of 75, your pension can be inherited without your inheritors paying tax on it. Annuities can’t be inherited.
Con: your pension can decrease in value if its investments perform badly. Your pension funds can also run dry if you cash in too much or if you live longer than you initially thought. On the other hand, an annuity guarantees a fixed income. Therefore, being much more anticipated.
Just remember that with income drawdown, you can decide to buy an annuity with the pension money that’s left.
PensionBee helps you to control of your saving. All your pensions are combined into one easy accessible pension plan.
Income drawdown is getting a pension income when you enter your retirement phase of life. Your pension keeps growing, but you can access your pension funds at the same time. That is if you’re 55 years or older. Meaning, you can start getting an income from your pension from the minimum age of 55.
Drawdown could be a good idea for you, but it’s not for everyone. It all depends on your long-term goals and needs, as well as the size of your pension pot. So, if the thought of an income and a growing investment sounds good to you, then it’s a good idea for you and your future.
From the moment you take your tax-free lump sum from your pension, you can start taking your income. You can also choose to do so at a later stage in your life. Alternatively, you can move your pension pot into income drawdown gradually. You can take up to 25% of every amount without being taxed, and you can put the remaining funds into income drawdown.
Knowing about Financial Advice, Pension Providers, and Regular Income is a good start. Firstly, always seek financial advice from trusted firms or your pension provider to avoid scams and such. Secondly, know about all the pension providers and what they have to offer before you choose one to invest your money with.
Thirdly and lastly, know about regular income. You’ll need to inform the pension provider and the HMRC of any income so that your taxes will be up to date and correct. Otherwise, you’ll be charged fees in the future of you might have trouble casing in your pension.
Income drawdown, although having pros and cons, can be quite a helpful tool to help you in your retirement! Your investment can keep on growing, and you can get a monthly income at the same time!