Pension drawdown rules: The pros and cons of taking your pension now

Pension: Expert gives advice on preparing for retirement

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For many approaching retirement, there can be a sense of dread when you consider navigating the various rules around accessing pension pots. Pensions can seem complicated, but they don’t have to be. Here, explains all the rules of pension drawdowns.

What is a pension drawdown?

A pension drawdown is when a saver takes a tax-free lump sum from their defined contribution pension, but keep the remainder of the money invested to keep an income for retirement.

It’s a way of getting income from your pension while allowing your funds to keep growing in the stock market.

Most personal pensions set an age when you can start withdrawing your cash – usually 55, but some providers do vary.

READ MORE: Pension credit to increase – but how much will YOU get?

What are the rules of a pension drawdown?

All new income drawdown arrangements set up after April 6, 2015 are known as ‘flexi-access drawdown’.

Under flexi-access drawdown, you can take up to 25 percent of your pension savings tax-free lump sum.

There are no limits on how much income you can withdraw from your remaining pension savings.

You could do any of the following: withdraw all of it in one go; take regular monthly or annual payments; or take a series of lump-sum payments as and when you decide you need them.

How much does pension drawdown cost?

Any subsequent withdrawals after your 25 percent tax-free lump are subject to income tax rates.

For example, if you have no income from any other sources, the first £12,570 is tax-free.

You then pay tax at 20 percent on the next £37,700 above this, then 40 percent on everything above £50,270 (£12,570 + £37,700), and so on.

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When is pension drawdown a good idea?

Taking a pension drawdown can be good if you’re not ready to take all of your pension straight away.

For example, if you’re lowering your working hours to part-time and not retiring fully, a pension drawdown could be a good option for you.

It also gives you the flexibility to take out sums of cash as and when you want – and these don’t have to be the same each time.

What are the risks of pension drawdown?

The biggest risk is running out of money. Many savers can exhaust their savings quicker than expected for a number of reasons.

These include if they take income at an unsustainable rate, have insufficient growth from assets, or experience “sequence of return”.

Sequence of return is when the market falls and withdrawals can limit the longevity of savings.

A pensions drawdown isn’t the best option if you want a guaranteed income each year, or if you are concerned you could run out of money, as exposing yourself to financial risk in retirement can have big consequences.

You should always seek financial advice when withdrawing from pensions and making other decisions.

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