Preparing For Drawdown
Please note this blog post was published over 12 months ago and so may not include the most up-to-date information, for example where regulation around investing has changed.
In our Master Your Money series we answer the most searched for internet queries on your personal finances. Today we are going to explain what a Drawdown Pension is.
Drawdown is a way of using your Pension pot to provide you with a regular retirement income, by reinvesting it in funds specifically designed and managed for this purpose. The income you get will vary depending on the fund’s performance.
You can normally choose to take up to a quarter of your Pension pot as a tax-free lump sum. Some older Pensions might let you take more than 25% so it’s worth checking with your Pension provider.
You then move the rest into one or more funds within a Flexible Income Product that allows you to take an income at times to suit you.
Some people use it to take a regular income. The income you receive might be adjusted periodically depending on the performance of your investments.
You can start Pension Drawdown from 55, although as with all investing, the longer you can stay invested and not touch your Pension, the more opportunity for growth you have. When you start Pension Drawdown, that’s the point, it means you can access money to live on while still leaving money invested to grow further and fund your future.
Pension Drawdown is a practical and tax efficient way of making your money do more. Growth in an investment is typically more effective towards the end of its time invested, as it has had the time to benefit from compound growth. With Pension Drawdown you can take some money while still being invested towards a wealthier retirement.
As with any investment, capital is at risk. Money left invested can go down as well as up, so you need to make sure your Pension is invested in a globally diversified Portfolio with some long term range in when you’ll want to withdraw your money. A globally diversified Portfolio means your eggs aren’t all in one basket, and giving an investment time helps to smooth out volatility in markets.
As with any big decision around your Pension pot, it is worth speaking to your financial adviser to decide if a Drawdown Pension is right for you. There’s considerations to be made on how tax efficiency works, how charges could apply, and factors such as the markets to bear in mind. Speaking to an expert is advisable.
Pension Drawdown could be a good idea if you want to take a Pension income now, while still leaving your Pension to grow further.
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