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.
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
The contents of this article are for reference purposes only and do not constitute financial or legal advice. Independent financial or legal advice should be sought in relation to any specific matter. Articles are published by us without any knowledge or notice of the circumstances in which you or anyone else may use or rely on articles or any copy of the information, guidance or documents obtained from articles. We operate and publish articles without undertaking or accepting any duty of care or responsibility for articles or their contents, services or facilities. You undertake to rely on them entirely at your own risk, and without recourse to us. No assurance of the quality of articles is given or undertaken (whether as to accuracy, completeness, fitness for any purpose, conformance to any description or sample, or otherwise), or as to the timeliness of the publication.
Latest posts by Silversurfer's Editor (see all)
- Freedom and confidence for colostomates - April 23, 2018
- Over 50s Travel Insurance from Just Travel Cover - April 23, 2018
- Do you think St George’s Day and St David’s should be made national holidays? - April 23, 2018
- The Queen – her life in pictures as she celebrates her 92nd birthday - April 21, 2018
- Back-Roads Touring brings the small group experience to Asia - April 19, 2018
Leave a Comment!
Community Terms & Conditions
These content standards apply to any and all material which you contribute to our site (contributions), and to any interactive services associated with it.
You must comply with the spirit of the following standards as well as the letter. The standards apply to each part of any contribution as well as to its whole.
be accurate (where they state facts); be genuinely held (where they state opinions); and comply with applicable law in the UK and in any country from which they are posted.
Contributions must not:
contain any material which is defamatory of any person; or contain any material which is obscene, offensive, hateful or inflammatory; or promote sexually explicit material; or promote violence; promote discrimination based on race, sex, religion, nationality, disability, sexual orientation or age; or infringe any copyright, database right or trade mark of any other person; or be likely to deceive any person; or be made in breach of any legal duty owed to a third party, such as a contractual duty or a duty of confidence; or promote any illegal activity; or be threatening, abuse or invade another’s privacy, or cause annoyance, inconvenience or needless anxiety; or be likely to harass, upset, embarrass, alarm or annoy any other person; or be used to impersonate any person, or to misrepresent your identity or affiliation with any person; or give the impression that they emanate from us, if this is not the case; or advocate, promote or assist any unlawful act such as (by way of example only) copyright infringement or computer misuse.
Nurturing a safe environment
Our Silversurfers community is designed to foster friendships, based on trust, honesty, integrity and loyalty and is underpinned by these values.
We don't tolerate swearing, and reserve the right to remove any posts which we feel may offend others... let's keep it friendly!