With the declining popularity of defined benefit schemes, a flexi-access drawdown plan might be the best way you can access your hard-earned pension savings.

For those with a “defined contribution” pension, a pension drawdown plan allows you to withdraw however much you want, whenever you want, while keeping the rest of your money earning a healthy return.

You will typically get to withdraw the first 25% of your pension pot as a tax-free lump sum (assuming your pension is within the lifetime allowance).

What you chose to do with the rest of your savings is down to you. However, any income you now withdraw will be subject to income tax rates. There are generally 3 options:

  • Withdraw a modest annual amount each year as your pension income
  • Purchase an annuity
  • Withdraw the rest in large lump sums whenever you need it – note that this method may incur significant income tax charges

So far so good – so what’s the catch?

What are the risks?

Your pension pot under a flexi-access drawdown plan will mostly be invested in the investment markets, making your savings vulnerable to market fluctuations.

Although this will likely offer generous rates of return over a longer time period, at any given point in time your pension pot can very easily go down as well as up.

Growth is not guaranteed. One positive is that those with cold feet can at any time purchase a lifetime annuity for a guaranteed income.

Historically, drawdown pensions invested in the stock market have earned very healthy returns. A skilled (or well-advised) investor with a large pension pot may be able to pay themselves an income entirely with fund growth, making their pension savings self-sustainable.

For those with a lower appetite for risk, many pension providers offer different investment packages that provide greater safety but, consequently, lower returns.

Alternatively, you can consult with your financial advisor to personalise your investment decisions to best suite your own needs.

Is it the best option?

As with most retirement decisions, what is best for someone else may not be best for you.

There are certainly many aspects of drawdown pensions which make them preferable to a lifetime annuity. For example, drawdown pensions (as opposed to most lifetime annuities) allow you to pass down your pension savings to your loved ones.

However, there are circumstances where you may prefer an annuity:

  • If you are sick you may be offered a generous annuity
  • You prefer a guaranteed income
  • You do not feel comfortable with investing your pension savings
  • You do not want to manage your own investments

Which retirement option is best for you depends a lot on your situation and what other sources of income you’re likely to have in retirement.

For an overview of all your options, book an appointment with Mark today:

Email: [email protected]

Phone: 01252 713645 and 07500 720938