Is drawdown right for you?
Since pension reforms were introduced, an increasing number of retirees have chosen to take flexible withdrawals from their pension. According to the Financial Conduct Authority, drawdown has become an increasingly popular option, with twice as many pension pots moving into drawdown than into annuities.
In basic terms, income drawdown is where you withdraw money from your pension pot on a regular basis to provide an income for your retirement. By leaving your pension pot invested and taking an income directly from it, you don’t need to use the money in your pot to buy an annuity. As the rest of your pension pot remains invested, it will continue to benefit from any investment growth.
TAKE TIME TO FULLY UNDERSTAND THE RISKS
Whilst drawdown offers flexibility, there are risks that you need to consider. The amount you could draw as income is not guaranteed, unlike an annuity. As your pension fund remains invested, it is vulnerable to price fluctuations, making it increasingly important to take advice. Without advice, you could find your income level drops, you could run the risk of running out of money – not a desirable retirement outcome.
THE VALUE OF ADVICE
In drawdown, there are risks in taking out too much and too little. This is where advice will help you plan your drawdown strategy and guarantee that it’s reviewed regularly. Taking out too much could have tax implications and restrict your remaining pension pot’s ability to provide an income for the duration of your retirement. If you draw too little you might not have sufficient to cover your living expenses.
Even though it’s no longer compulsory to take an annuity at retirement, they still offer valuable benefits. You may choose to put a portion of your pension pot into an annuity to provide a regular guaranteed amount for the rest of your life, to cover your core living costs for example.
A pension is a long-term investment. The fund value may fluctuate and can go down. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation.
INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM TAXATION, ARE SUBJECT TO CHANGE.
TAKING WITHDRAWALS MAY ERODE THE CAPITAL VALUE OF THE FUND, ESPECIALLY IF INVESTMENT RETURNS ARE POOR AND A HIGH LEVEL OF INCOME IS BEING TAKEN. THIS COULD RESULT IN A LOWER INCOME WHEN THE ANNUITY IS EVENTUALLY PURCHASED