Drawing down your pension is a way of releasing money from your pension fund whilst still leaving the bulk of your savings invested. Once you are over 55, so long as you hold a Defined Contribution pension scheme, you can release an income on a monthly basis or as and when you wish. In this way, you can live off the money that you have saved in your pension plan whilst still potentially making money on the rest of your investment.
How it Works
You can usually if you decide to take a pension drawdown access up to 25% of your total pension pot as a lump sum which is tax-free. You would then need to move your pot into a drawdown fund, that allows you to take out money as you wish. You could place your fund into a Flex-access Drawdown plan where there is no limit on the amount that you can withdraw or a Capped Drawdown where there is a limit on the amount of your pot that you can release.
Putting your savings into a drawdown pension fund means that you have access to it at all times, it doesn’t mean that you have to withdraw it but it can provide a safety net in knowing that it is there available for you if you need it. You can also benefit from having a tax free lump sum, this is not available with other pension fund withdrawal methods unless you take the annuities or open-market route. Another reason why you should consider this type of pension scheme is the fact that, so long as you choose the flexi-access option, you can withdraw any amount, whenever you like whilst you leave savings invested. This gives you the chance to keep an eye on your investment and withdraw money to keep it safe if you don’t think that things are going well.
As with anything in life, there’s not just the good to consider but also the bad. The first thing that you need to be aware of is that drawdown schemes tend to have higher charges than any other pension scheme because there is the need for regular reviews to ensure there’s enough money to last your retirement period. You also need to be aware that this money does need to last in order to provide you with an income for the rest of your life. There is no way of knowing how long you will live, so you do need to plan carefully if you choose this option. You also need to be wary of your investment. As with any investment, there is a risk that they can go up or down. If they go down whilst you are also withdrawing money, will you be left with enough to live on throughout your retirement?
Drawdown schemes can be very enticing because they give you the chance to enjoy some of your hard earned money up front. You do need to be wary though, at the end of the day, you have saved that money to get you through your retirement period so you need to make sure that it lasts for your lifetime.