What is a Drawdown Pension?
There are many elements to understand about Pensions, and one of the most asked questions happens to be ‘What is a Drawdown Pension?’.
There are a number of ways that you can take your Pension when it’s your time to leave the world of work and enjoy your retirement, and Drawdown is an option you could consider.
Put simply, a Drawdown Pension is one way of using your Pension pot to provide you with a regular retirement income or withdrawing lump sums.
You can normally choose to take up to a quarter of your Pension pot as a tax-free lump sum. Some older Pensions might let you take more than 25% so it’s worth checking with your Pension provider. It’s important to ask yourself if you need the full 25% tax-free lump sum. If you choose to withdraw the lump sum when it is not needed and you leave it sitting in the bank, over time inflation may chip away at it and your hard-earned money could lose value.
Whether you choose to take the 25% tax-free lump sum or not, you can move your pension into one or more funds within a flexible access drawdown that allows you to take an income at times to suit you.
Some people use the drawdown pension option to take a regular income. The income you receive might be adjusted periodically depending on the performance of your investments.
You can start Pension Drawdown from 55, although as with all investing, the longer you can stay invested and not touch your Pension, the more opportunity for growth you have. When you start Pension Drawdown, it means you can access money to live on, while still leaving money invested to grow further and fund your future.
Drawdown Pension is a practical and tax efficient way of making your money do more. Growth in an investment is typically more effective towards the end of its time invested, as it has had the time to benefit from compound growth. With Pension Drawdown, you can take some money while still being invested towards a wealthier retirement.
As with any investment, capital is at risk. Money left invested can go down as well as up, so in order to manage your risk, you should make sure your Pension is invested in a globally diversified Portfolio, and leave it invested for a long time. A globally diversified Portfolio means your eggs aren’t all in one basket and giving an investment time helps to smooth out volatility in markets.
As with any big decision around your Pension pot, it is worth speaking to your financial adviser to decide if a Drawdown Pension is right for you. There are considerations to be made on how tax efficiency works, how charges could apply, and factors such as the markets to bear in mind. Speaking to an expert is advisable.
Pension Drawdown could be a good idea if you want to take a Pension income now, while still leaving your Pension to grow further. Remember, if you withdraw your pension and leave it sitting in a Cash ISA – not being used – you run the risk of your money losing value because of inflation.