27 Feb 2015
Alan Davidson, Paraplanner, looks at Pension Drawdown.
When it comes to taking an income from your pension savings, Pension Drawdown is considered one of the most flexible ways to access your funds. With the new Pension legislation coming into play in April, it offers a solution for those who want to take their 25% tax free cash and/or an income now but who want to keep ongoing flexibility when pension rules change.
With Pension Drawdown you leave your pension savings invested and take an income directly from it, which means that your income can be flexible to suit your personal needs. You have the ability to manage how much income you take to ensure that it lasts your lifetime and doesn’t run out, plus the freedom to choose where your pension savings are invested, which could potentially lead to the growth of your investment.
It is important to remember that the value of your savings is linked to how much you withdraw and the performance of your investments, therefore it has the potential to increase but also decrease in .
You have the freedom to stop, start or change the amount of income you take from your Pension Drawdown plan each year. Currently the government has limits set on how much income you can directly take each year from a Pension Drawdown plan, however from April these limits are to be removed completely.
There are many different providers and funds you can choose to invest through, each offering varying degrees of investment risk – the greater the risk, the higher the potential opportunity to grow your pension savings and therefore sustain an income for longer.
However, clients must be aware that there is also a chance that the value of your investment could fall, and if you are completely risk averse you may wish to consider an annuity product instead which is not only free from risk but also offers a regular guaranteed income, regardless of how long you live – something which Pension Drawdown does not offer.
A key area of consideration is diversification, you may choose to invest some of your money through Pension Drawdown whilst also buying an annuity to help cover any essential living costs.
Should you pass away whilst your pension savings are held in a Pension Drawdown plan, any remaining savings can be passed on to your beneficiaries. One of the big changes due in April is that the current 55% tax rate paid by beneficiaries is to be abolished. Depending on your age when you die and how your beneficiaries choose to take the inheritance, the tax could be 0%.
If you were to access your pension savings today but die before the new April tax changes come into force, any beneficiaries could still benefit from the new lower tax rates by waiting until after April to take an income or lump sum from the remaining estate.
As you can see, drawing income from your pension is to become much more flexible for clients, this is an area full of many choices and choosing the right option for you and your own circumstances is extremely important. If the wrong option is taken, it could prove very costly in the long run, so taking expert professional advice is essential. An experienced Independent Financial Advisers will be able to give you correct guidance.