Income drawdown – Don’t let your pension become a DIY disaster
With the advent of the new ‘pension freedoms’, income drawdown became the best retirement option for millions of Britons. Unfortunately, most of us don’t have a clue as to the risks attached…
Income drawdown has been around since 1995. It was created to provide an alternative to buying an annuity at retirement (although back then it just deferred annuity purchase until age 75). Of course, since then annuity rates have plummeted to 300-year lows.
Fortunately, thanks to a comprehensive upgrade as part of the 2015 pension freedoms, drawdown is now the most flexible pension arrangement this country’s ever had. Even so, retirees will need to tread carefully if they’re to succeed in nurturing their pension pots through retirement.
Flying free
Today ‘flexi-access drawdown’ (as it’s now known), puts you in control and allows you to invest your pension pot in whatever way suits your needs. You can create a bespoke programme of lump sum and income ‘drawdowns’ (subject to the tax rules) while the flexibility it offers could keep you in a lower tax bracket, which will considerably reduce the bite that HMRC takes from your retirement income.
The pension freedoms also made drawdown the most tax-efficient way in which to pass pension wealth to your loved ones. Now, if you die before age 75, all your pension assets can be passed to your beneficiaries free of tax. If you last longer, they’ll be liable to income tax at their marginal rate on anything you leave them (although they can defer taking the money until it’s more tax-efficient to do so).
The drawbacks with drawdown…
Some commentators like to talk about the ‘democratisation’ of investment risk that has accompanied drawdown. What they mean is that drawdown transfers the investment risks squarely on to your shoulders.
The biggest threat is that your investment choices perform poorly at the same time that you’re drawing an income. If this happens, there’s a good chance that your pension pot will expire long before you do. This is colourfully known as ‘pound cost ravaging’.
To help prevent Britons being ‘ravaged’ in retirement, Drewberry Wealth’s created an Income Drawdown Pension Calculator – a free online tool that calculates just how much income you can afford to take and how long your pot’s likely to last. It’s also the ideal way to work out how large a pension pot you’ll need to deliver your dream level of income.
Don’t get ‘ravaged’ in retirement
If properly managed, income drawdown could deliver a far higher level of income than an annuity as well as bags more flexibility and tax saving opportunities. It’ll also transform your pension into a major asset that can be passed from one generation to the next.
A great many Britons will need to use income drawdown at some point. Just don’t try it on your own. The best way to achieve your retirement ambitions is to find a financial adviser you trust and let them create the right balance of investment and withdrawals for you and your family.
Neil Adams is Head of Pension Planning at
Drewberry Wealth Management
Disclaimer
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