Pension drawdown - a flexible income
If you have a defined contribution pension, there are a number of ways in which you can use it to fund your retirement. In the past, most people used their pot to buy an annuity (a guaranteed income for life) and this remains a popular option. However, one alternative has grown in popularity: drawdown.
How can I control my income during retirement?
One downside of an annuity is that, once you’ve set it up, you can’t then vary the amount you receive. Drawdown is a more flexible option. It lets you choose how much you’d like to withdraw each year – so you can increase your income if you have greater spending needs, or reduce it if you don’t need as much, or want to minimise your tax bill.
Are there any other benefits of drawdown?
As well as this flexibility, drawdown has the potential to deliver higher income than an annuity (though the opposite can also happen – see below). What’s more, you retain control over your pension pot, which means your family can inherit it when you die. Any unused funds in your drawdown scheme are normally passed on tax-free to your nominated beneficiaries.
What are the risks of drawdown?
The main thing to remember about drawdown is that your pension pot is of a limited size. So unlike an annuity (which pays a guaranteed income for life), a drawdown scheme can run out of money.
Your pension pot can also lose value. The pot remains invested in the stock market, so if the market performs badly, it can shrink even if you don’t take any income. Also, the more money you take out, the harder it is for the pot to grow again. Drawdown funds can therefore shrink at a faster and faster rate, making it hard to judge how long they will last.
Finally, because of such risks, a drawdown scheme needs ongoing attention from you and/or your financial adviser – unlike an annuity, which takes care of itself once it’s set up.
Is drawdown right for me?
Choosing to use drawdown should not be a quick decision. Whether or not it suits you will depend on many factors, including your overall finances, your retirement plans, your family situation, your attitude to risk, and the current economic circumstances too. For this reason, no-one should opt for drawdown without first discussing it with an independent financial adviser.
Your adviser will help you decide whether drawdown is best for you, and can also find the most suitable scheme for you from the whole of the market. You may even discuss using drawdown as part of a combined strategy that also includes an annuity, to give a balance of flexibility and security.
Find out more about your options for drawing your pension.
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