Retirement can either be the most comfortable or troublesome stage in your life, depending on how much you are financially prepared. Pension is one of the most important income sources that ensure you live a worry-free and happy life. But, again, a proper pension planning must be there to make the most of it. You must know different ways you can access your pension pot and take out the money as a fixed income in retirement. Pension drawdown is the most important consideration when it comes to taking income from your pension.
You must have heard about the drawdown option but haven’t paid much attention to it. It may be a high time for you to understand and embrace income drawdown, especially if you are about to retire in a few years. Let’s help you know more about this option so that you can make the right decision with your pension and retirement income.
What is Pension Income Drawdown?
Pension drawdown is the most effective and flexible way of using your pension pot to get a regular retirement income by reinvesting in options specifically designed and managed for this intent. The income you receive will vary based on the fund’s type and performance.
With pension drawdown, you can receive pension income after retirement while ensuring that your pension fund is growing consistently. Instead of using your entire pension savings to purchase an annuity, you have your cash invested and receive a regular income through the funds directly.
How Does it Work?
When considering pension drawdown, you can usually take out up to 25 % of your pension as a tax-free lump sum. Some older pension plans may allow you to take more than 25%. Thus it is advised to check and confirm with your pension provider. Also, note that the tax benefits may be subject to change and depend on your particular circumstances.
Next, you can transfer the remaining amount into one or more funds having a Flexible Income Product that lets you take an income as and when you need it. But, the income you will get maybe altered periodically based on the performance of your investments.
You can continue single withdrawals as and when you prefer, as long as you have the funds available. Also, you can set up a regular pension withdrawal option and adjust the amount and frequency of withdrawals.
Remember that, the value of your pension may decrease or increase and you may receive less than that has been paid in. Therefore, regular pension review is a wise practice to ensure you’re comfortable with the level of risk included.
How Much It Costs?
Before deciding on a drawdown option, you must check how much it will cost you. Sometimes, pension drawdown can be a costly option as there will be continuing charges for managing your investments. There may also be changes in reviewing your pension regularly. You must ensure that the investment value grows enough to cover the additional costs.
When to Consider Drawdown Your Pension?
You can consider the pension drawdown option if you don’t want to take all of your pension money straight away. For instance, if you are thinking of carrying on working part-time somewhere, you may not be ready to take the entire pension money. In this case, pension drawdown can be a wise choice.
However, pension drawdown is ideal only if you are comfortable investing your pension money in the stock market to have a reasonable chance of growing it. There may be high risk associated with this option as the stock market can go up or down anytime.
It is advised to choose a drawdown option only when you have a large pension pot or have planned for other sources to get enough income in retirement. It is good to consult with an experienced financial advisor to know if you are ready for a drawdown option.
When planning for a better retirement, you should pay equal attention to your pension income as of other options. Make sure you choose the right option that gets you maximum retirement income with your pension. Try to review your pension plan, use the pension drawdown tax calculator, and consult with the best financial planner before making any investment decisions.