What Really Is Drawdown?
If you are approaching retirement, you are most likely to come across the option known as drawdown. As we are aware, pensions can be difficult due to the complicated jargon, so knowing exactly what each option means can be a challenge. Knowing the meaning of each option is important as it can determine what your retirement could look like and if the option is right for you.
What is drawdown
Flexibility is one of the key components drawdown pensions can offer as it gives you the opportunity to move your money from your workplace or personal pension funds to help with your daily needs while keeping the remaining money invested. The money that you do not drawdown will normally be invested in the stock market and has the opportunity to grow. A drawdown pension is the opposite of an annuity; an annuity gives you guaranteed income for a fixed amount, while on the other hand drawdown means that you will not always be guaranteed income and will not use all your pension pot. The reason for this is that the value of the invested pot could decrease if the amount you invested does not go well. This is where financial advisers like myself can come in handy; to help you manage your finances, and investments and avoid any potential risks.
How does drawdown work?
To be able to choose the drawdown option, you must set up an arrangement with your current pension provider, if they do not offer a drawdown pension, then you may have to transfer to a different provider. However, before going ahead with your pension provider, it may be beneficial to consider getting quotes from several pension providers and ensure that you are not obliged to pay extra charges if you choose to transfer. Getting the best deal will allow you to get the most out of your money.
Once you move some or all of your pension into drawdown, you can decide to take up to 25% from your pension pot as a tax-free lump sum. Any amount that is withdrawn after the 25% lump sum will be taxable as earnings in the tax year. When the 25% of your pension savings have been withdrawn, you must then establish where you would like to invest the remaining 75% of your pension pot to move into drawdown.
Investing in your pension can be a risk as you are not guaranteed income due to market fluctuations or inflation. For that reason, getting in touch with an experienced financial adviser like myself can help you make wise investments to avoid any risks and lose your life’s pension savings. Not only will I be able to assist you with your investments, but I ensure that you pay the right amount of tax given your annual income from your investments.
Another way of moving into drawdown is by gradually moving your pension pot. To do this, you can take 25% of each amount that is moved from your pension pot tax-free and place the rest into drawdown. This is known as partial drawdown. When it comes to withdrawing, there is no better way than the other. As a financial adviser, I can also help you make the right decisions like this by helping you understand the pros and cons of each option. While I am able to suggest what is best for you, the ultimate decision is yours to make.
Advantages of drawdown
The advantage of drawdown is that you have access to tax-free pension money. While having access to tax-free money, you also have the flexibility to oversee your pension funds by adjusting your drawdown income up and down in any tax year.
Other advantages include having the opportunity for grown and excellent inheritance rules. Leaving your money for investment means it has the potential to grow, resulting in a content retirement. Pension drawdown enables customers to pass on any invested funds without any inheritance tax.
How do I know drawdown is right for me?
Knowing that the drawdown option is right for you is down to you to decide but to make the decision-making process easier and to help you achieve your financial goals, getting in touch with me, who is a dedicated financial adviser, will make choosing the right option much simpler. I am known for steering you in the right direction by doing thorough research about your circumstances and helping you choose the product that will guarantee maximum returns.