Drawdown is a flexible way to take income from your pension savings.
Key facts
Drawdown in some form has been in existence for many years. With a drawdown pension the fund remains invested and an income is withdrawn. This income can be wholly taxable, a combination of tax free cash and income, or just tax free cash.
If the fund growth is higher than the income withdrawn, the pension fund will increase in value. However, if the opposite happens, or the pension fund falls in value, the fund can run out.
Another approach to drawdown is to take your tax free cash (normally 25% of the fund value) as a one-off lump sum and then leave the remainder of the fund invested until you need it to provide an income.
Reading time
5 mins
What you need
An understanding of Pension Freedoms
Key themes at a glance
Withdraw an income
The fund remains invested and an income is withdrawn - this can be wholly taxable, a combination of tax free cash and income, or just tax free cash
Your fund could vary
If the fund growth is higher than the income withdrawn, the pension fund will increase in value - but if the opposite happens, or the pension fund falls in value, the fund can run out
Lump sum option
You could take your tax free cash as a one-off lump sum and leave the remainder of the fund invested until you need it to provide an income
What is drawdown?
Drawdown is a flexible way to take income from your pension savings, while they remain invested.
Watch our short video to find out more.
The good things about drawdown
Tax management
You could withdraw your tax free cash entitlement over a number of years, or withdraw a mix of tax free cash and income to control what tax you pay and when. The pension will also remain outside the scope of Inheritance Tax.
Growth potential
The amount in your pension could increase in value over time as it remains invested.
Keeping your options open
You don’t need to stay in drawdown for ever. If you decide that a guaranteed income is a better option, you can use your fund to buy an annuity.
Not-so-good things about drawdown
Running out of money
There are no guarantees with drawdown! You could run out of money altogether. It’s important to make a plan so your income is sustainable over your lifetime. We can help you with this.
State benefits and debt
If you get any income-related State benefits such as Universal Credit, taking cash could affect the amount of benefits you get. Your cash will be taken into account when working out your benefits. Also, if you have debts, your creditors can get at any cash you take out of your pension.
Pension contributions
As soon as you have received any taxable income from drawdown, the amount that can be paid into pensions reduces from £60,000 to £10,000 a year.
Management costs
Because your pension savings will remain invested, there will continue to be management costs. There may also be additional costs associated with paying you an income.
“Drawdown is a great complement to a guaranteed retirement income, giving people choice and flexibility. But it shouldn’t be entered into lightly, as there's always a possibility of running out of money.”
Josh Gordon BA (Hons) FPFS Head of Financial Planning
