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?
So let’s begin.
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.
Pension Income Drawdown VS. Annuity
Retirement Income Drawdown is a popular way to get income from your pension. With this choice, you can choose how much of the fund value (or ‘drawdown’) and when in retirement it’s taken as an annual payment while still leaving some funds invested with growth potential for later years.
On the other hand,
Annuities are another type of option that you may want to explore during your planning process if they’re available in your jurisdiction. You will typically have at least two types of annuity options – immediate or deferred – which differ according to whether withdrawals happen before age 75 or not. The best decision comes down to what kind of payout each individual prefers because there’s no right answer for everyone.
Moving Your Pension Into Drawdown
This is a type of income option for people who have an existing pension and want to withdraw some funds from it every year as they near retirement. It has the effect of dividing your fund value into smaller units, so when you choose how much money to take out each year, one unit represents £x per year.
But the thing is,
The final decision on whether to convert your pension savings into drawdown or invest them remains up to you, but speaking with someone qualified about which options are available will help make that choice easier. It’s important not just because doing the wrong thing could be financially disastrous, but also because you want to plan for the future in a way that feels right.
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).
Guide to Drawdown
Many people are keen to make some money from their pension savings each year, but not all want or need the full amount. You can use drawdown for a type of income option if you have an existing pension and wish to withdraw funds on an annual basis as you near retirement.
The benefit is that it divides your fund value into smaller units so when you choose how much money to take out each year, one unit represents £x per year. This means less risk in case there’s a downturn during your lifetime with interest rates at historically low levels.
The Pros & Cons Of Income Drawdown
Pros and cons to income drawdown 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 2 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
With income drawdown, you can decide to buy an annuity with the pension money that’s left.
What Does Income Drawdown Mean?
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.
Is Drawdown A Good Idea?
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.
How Do I Get A Pension Drawdown?
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.
What Else Should I Consider When Getting My Pension?
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.
It’s good to know that,
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!