If you’re looking for flexibility, then drawdown – often known as flexible drawdown or flexi-access drawdown – is a way of taking an income from your pension as and when you need it.
The rest of your pension stays invested, either with your current pension provider or another provider. Over the long term, this will typically allow you to benefit from any growth in the value of your investments but it’s important to bear in mind that as your money remains invested, your pension savings could fall as well as rise in value, so you’ll need to be comfortable accepting this risk.
You’ll usually still be able to take out 25% of the funds as a tax-free lump sum at the outset.
There’s another kind of drawdown scheme available, called the Uncrystallised Fund Pension Lump Sum (UFPLS). Rather than taking a 25% lump sum payment at the start, each time you draw down money from your pension, 25% of it will be tax free, and you’ll pay tax on the remaining 75% of the payment.
When you die, any money that’s left in your pension pot, can be passed on to your loved ones tax-free if you’re aged under 75 when you die. If you die aged over 75, your beneficiaries will simply have to pay income tax on any income taken from it. They won’t typically need to pay inheritance tax (IHT) on drawdown money, as it’s considered to be outside of your estate.
Maike Currie, investment director at investment managers Fidelity International said: “For those nearing retirement, working for longer may not be an option they either want or can pursue, depending on their circumstances. Similarly, they’re likely to want to hold onto their desired standard of living as much as possible.
“Drawdown allows you to remain invested for as long as possible – benefiting from potential market recovery – while also offering you access to flexible income. However, always make sure you have sufficient cash or a guaranteed income – this could be your state pension, an annuity or defined benefit pot – to cover the essentials. As COVID-19 has taught us all, you really never know what is waiting around the corner.”
You can find out more about pension drawdown in our guide to How pension drawdown works.