Income drawdown is one of the ways for people in the UK to use their pension funds to create an income in retirement. Yet, research from this year’s campaign found that 52% of those surveyed did not feel knowledgeable about this pension product. Income drawdown provides an alternative to with your pension fund(s).
In this guide we’ll explore some key aspects of income drawdown, helping you understand how it can work for your retirement.
What is income drawdown?
Income drawdown is also known as flexible retirement income or flexi-access drawdown. It lets you withdraw money from your pension while keeping the rest invested. This flexibility gives you more control over how you access your retirement savings.
How does income drawdown work?
- Leaving your pension invested: Income drawdown is an alternative to an annuity. It allows you to leave your money invested in pension funds. You have control over your pension savings while taking a regular income directly from them.
- Flexible cash withdrawals: You can take as much or as little from your pension funds as you want, starting from age 55 (rising to 57 in 2028). There are no limits or caps on withdrawals. This flexibility may be useful if you have varying financial needs during retirement.
- Lump sums or regular income: You have the option to take lump sums or receive a regular steady income.
- Investment growth potential: By keeping your pension fund invested, you give it the chance to hopefully continue to grow. If your investments perform well, your retirement income can increase over time. However, keep in mind that poor investment performance could also reduce the value of your income.
What are the main advantages and disadvantages of income drawdown?
Income drawdown can be a flexible way to manage your pension, but it comes with its own set of pros and cons.
Advantages:
- 1. Flexibility: You choose how much to withdraw and when.
- 2. Investment potential: Your pension funds could continue growing.
- 3. Beneficiary planning: Unused funds can be left to beneficiaries when you pass away.
- 4. Control: You retain full control of your funds.
Disadvantages: - 1. Income is not guaranteed: Unlike annuities, drawdown doesn’t guarantee a certain level of income for the rest of your life.
- 2. Investment risk: Your pension fund’s value can fluctuate based on market performance. It could go down as well as up.
- 3. Fees: Drawdown involves ongoing investment fees.
- 4. Planning required: Income drawdown requires more planning and management than an annuity.
Research from our Get Britain Pension Ready campaign found that 52% of those surveyed were baffled by the pension term drawdown.
Who can use income drawdown?
To use income drawdown, you need a defined contribution pension. These include:
- Personal and Stakeholder Pensions
- Self-Invested Personal Pensions (SIPPs)
- Most Workplace Pensions
If you have a final salary pension (also known as a defined benefit scheme), you typically aren’t able to use drawdown. These schemes promise a guaranteed income based on your salary and years of service. It’s possible to transfer a defined benefit pension to a defined contribution scheme for drawdown. However, it’s not often recommended due to valuable guarantees you’d be giving up. If the fund is worth more than £30,000 you must speak to a financial advisor to understand if a transfer is in your best interest.
Not sure if your pension is defined benefit? Take a look at our post on how to know if you have a defined benefit pension scheme. If you do have a final salary pension it’s best to seek regulated financial advice before making any decisions.
Is income drawdown right for you?
Deciding whether income drawdown is the right choice for your retirement is a big decision.
To help you make an informed choice, you may want to consider the following factors:
- Risk tolerance: Income drawdown involves investment risk. If you’re risk-averse, a pension annuity may be a better option for you.
- Financial goals: It’s important to assess your financial goals and lifestyle needs for retirement. Income drawdown suits those who want flexibility and control over their pension income. An annuity on the other hand may be better for those who prefer the peace of mind of a guaranteed income.
- Professional advice: Talking to a financial adviser could be helpful. They can help tailor your approach based on your individual circumstances. Take a look at our blog post on how much pension advice costs.
Remember that income drawdown is a potential option for those with a defined contribution pension. If you’re unsure about your pension type, it’s best to check with your provider.
