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Pension drawdown is a way taking funds out of your pension to provide an income once you’ve retired. This can be done all at once or in stages, dependent on your requirements, but it’s important to understand the costs and benefits associated with the decision you make.
Taking Your Tax Free Cash
Once you are 55 years old, you can usually have up to 25% of your pension paid to you tax free.
If you wish to drawdown your pension in stages, then you’ll also receive your tax-free cash in stages too (up to 25% of the portion you move each time).
Check with your scheme provider what your options are as their rules may restrict the amount of tax-free cash you can withdraw.
Remember: pension and tax rules can change, and the value of benefits will depend on your individual circumstances.
Choosing Your Income
In a ‘flexible’ pension scheme you’re in control of how much income you take and when. You might decide you don’t need an income straight away, or even at all. You might just want to take your tax-free cash.
If you do want an income, you can choose to take regular withdrawals or just dip into the pot as and when you need to— it’s up to you.
Like all other pension income, it will be taxable and added to any other income you receive that same tax year. Be particularly aware of this if you’re planning on large withdrawals—don’t become a higher-rate tax payer by mistake.
Think carefully about how much you want to take. If you withdraw too much too soon, you might fall short in later years.
Picking Your Investments
For lots of people, one of the biggest attractions of flexible drawdown is the potential for your pension funds to continue growing. Unfortunately there’s no guarantee as investments carry a risk and you could get back less than you initially invest. Your goals and plans for taking income will have an impact on what investments you choose and your level of investment risk.
Be aware that most investments carry charges so the income you ultimately receive will depend on the returns from your investments, less any charges. So remember to consider these before making any decisions.
Keeping some cash in reserve in case of an emergency might give you peace of mind, and would mean you can avoid selling your investments. Be aware that cash can lose value over time especially if interest rates are low and inflation is high. Holding large amounts of cash for long periods is unlikely to be a good investment.
How we can help: We can help you match your goals with the decisions you make to ensure you make right choice with your money.