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Pension drawdown is a way moving funds out of your pension to provide a regular 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 move your entire pension into drawdown, you’ll receive all your tax-free cash in one lump sum payment.
If you choose to move your pension into drawdown in stages, then you’ll receive your tax-free cash in stages too (up to 25% of the portion you move each time).
Remember: pension and tax rules can change, and the value of benefits will depend on your circumstances.
Choosing Your Income
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.
Drawdown income isn’t secure so you need to think carefully about how much you 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 drawdown is the potential for income to continue growing. But there’s no guarantee. Because investments carry risk, you could get back less than you invest. Your goals and plans for taking income will have an impact on what investments you choose.
Most investments carry charges, and the income you ultimately receive depends on the returns from investments, less any charges. So remember to consider these, as well as charges of any other options you’re thinking about before making any decisions.
Keeping some planned reserve in cash might give you peace of mind, and would mean you can avoid selling your investments to generate cash for withdrawals. But 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 long-term 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.