Fast Finance Facts: What is a Pension Drawdown?

Now more than ever, in a world that seems increasingly uncertain, it’s vital to put in place some plans for the future. As we’ve seen in the past couple of years anything can happen, so it’s important to ensure you have the best possible financial advice in order to make plans that suit your personal circumstances. Engaging a reputable financial advisor will allow you to see beyond your monthly payslip and not only secure a comfortable retirement, but also grow your wealth in the most efficient way.

Taking Care of your Future

While a good financial planner will be able to take care of all your needs on an individual basis, having a basic understanding of terms or processes you might encounter is a very good idea. While everyone probably already knows what a pension is, a pension drawdown may be an unfamiliar term. Here’s a basic, easy to understand rundown on a pension drawdown and how it may apply to you. 

Do remember that the following information is very general, so you’ll need to talk with a professional to decide whether it is appropriate for you. 

What is a Pension Drawdown?

In a nutshell, it’s a way of gaining an income from your existing pension pot (while allowing that to continue growing), by reinvesting it in a fund or funds that are specifically set up and managed for that particular purpose. There are many different ways to do this, all of which can have varying results – hence the need to engage an independent expert to do it for you. It should also be noted that this process does not come with a lifetime guarantee.

How Does it Work?

You can move your existing pension plan into a Flexi Access Drawdown account, from which you can take out a portion of your existing retirement fund as a tax-free amount, which can either be used for outstanding liabilities or used to re-invest and create a tax-free income stream.  From the remaining fund, you can take an income that is taxed at your marginal rate of tax.  How and when you choose to have this come paid to you will depend on your situation and needs. Of course, the amount of the income itself will depend directly on numerous factors, including how much is in the drawdown plan, how/where the funds are invested and how they perform.

Meanwhile, your original pension pot will continue to grow. It’s pretty easy to see that in order for this to work effectively, the pension drawdown fund(s) need to be wisely chosen so it’s worthwhile and leaves you financially better off.

Is it Right for You?

Only you and your financial advisor will be able to determine whether this is a wise and prudent financial decision to make for your future. You’ll need to consider many things, one of the most important of which is the tax implication on both the income you draw and on any future retirement fund savings. 

Remember that a pension drawdown is just one option open to you and, if it’s not right for your particular circumstances, there are others. Before you make any decisions you should consult an independent financial advisor, who will be able to guide you every step of the way. If you look at engaging an expert as a long-term investment in your future, you’ll have a wealth of options at your fingertips that you may otherwise never even have known about. And that’s priceless. 

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