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Pension Income Drawdown Advice



Income drawdown is a method of taking an income from your pension subject to you reaching the minimum age. It's a complex subject and we'd be happy to guide you.

There are many options when deciding what to do with your pension, we always like to get a good understanding of your circumstance before providing personal advice, give us a call today to get things started.

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Simplifying income drawdown

This video is about income drawdown, drawdown is a method of taking income from your pension once you've reached the minimum age, which is 55.

Drawdown has many technicalities its complex and has variable aspects which you should be aware of if you're looking to explore whether drawdown is right for you.

The following is a simplified explanation of the subject provided to outline the top level factors and considerations.

You should seek specialist advice from an appropriate qualified advisor before taking any action. In the UK today there are basically two types of pension schemes: defined contribution and defined benefit.

The drawdown options we will be explaining apply to defined contribution schemes which are typically personal pensions, sips and stakeholder pensions.

Those pensions are where there's a pot of money invested which you control. Defined benefit pensions such as a final salary company scheme are different.




Options with a defined contribution pension scheme

If you have a defined contribution pension scheme you will have three options at the time you want to start taking money from your pension:

    1. You can withdraw everything
    2. You can convert your pension to an annuity
    3. instigate income drawdown

These three options are not independent of each other, you can do a bit of each or combine them.

This video is not about which option is best or most suitable. We can help you decide on the options, but let's assume you're looking at drawdown for some or all of your pension funds

How does drawdown work? You can use your existing pension if it provides a drawdown facility or move to a new plan.

Some pension providers do not offer drawdown, you can move your pension in stages into drawdown. Each time you move your money into drawdown twenty-five percent can be taken as a tax-free lump sum, the remainder stays invested. From the invested amount you draw income.

For example you move £100,000 into drawdown, £25,000 is taken as a tax-free lump sum and £75,000 remains invested.

You can then take taxable income from the £75,000 from the amount that stays invested.




How much income are you allowed to take?

As little including none at all or as much as you like, but remember any income you take is taxable at your highest marginal rate of tax. Also you need to be wary if you take too much income your remaining invested could fall in value and you could run out of money entirely.

Imagine a pension with £75,000 thousand pounds in your pension pot, electing to take 5% percent income per year. This is £3,750 taxable income per year over the next three years.

After you start taking this income, the invested income falls in value by 25%.

Because of poor investment returns you have drawn 5% each year and your invested value has fallen. In this scenario, your remaining sum after 3 years would have fallen from where it started:

Drawdown needs to be approached with great care and with great skill. Applied regular reviews should also be made to the arrangement.

Drawdown is highly flexible, the income level is not fixed and you can reduce or increase the amount at any time and you can even stop taking income if it's no longer required.

You can invest your money and drawdown wherever you like provided it's in a permitted investment. For example you can invest in cash shares, fixed interest and property but not residential property.

You need to constantly review your investment mix and of course when running your drawdown plan there will be charges and costs which may vary.




Income Drawdown is very flexible

Whilst there are risks with income drawdown it is very flexible, which for many people in retirement can be very important.

Income drawdown can also be highly tax efficient and offer a better situation on death than the annuity alternative. However this is often determined by your personal situation and should always be tested by taking appropriate advice.

The key to drawdown assuming it's the right option for you, is to find the most suitable investment approach to manage the risk as best you can and in line with your attitude to risk (whilst generating the required income.

One final factor to stress is you can always convert to an annuity at any time!

So choosing income drawdown does keep your options open and is a highly flexible way of taking income from a pension. It does need to be treated with great care and as professional advisors we can help you with this.

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