Drawdown refers to a type of pension in which your savings remain invested – and can therefore keep on growing – after you retire. Sounds good, doesn’t it? With a pension drawdown, you have control over how often you withdraw your money, and how much of it you want to withdraw each time. This is in contrast to an annuity, in which you make an agreement with an insurance company for them to pay you a fixed amount of your pot at regular, predetermined intervals a bit like a salary.
Due to increased life expectancy and long-term interest rates, the average annuity offered by insurance companies has become smaller and smaller since the 1990s. This led to a widespread decline in the popularity of annuities and the emergence of drawdown income products. Drawdown is now the preferred pension option for most people today, provided they have what’s known as a money purchase or defined contribution scheme (i.e., one where the amount you and your employer pay in is invested in your own individual pot of money).
Upon your 55th birthday (57 starting in 2028), you can begin accessing your pension. With a drawdown, 25% of your pot can be taken tax-free, with the remaining 75% subject to tax in the same way as a salary. This 25% can be taken in a one-off lump sum, or over time until you have reached the full allowance. How much you withdraw from your drawdown pension determines what tax bracket you will be entered into, which is why it is important to consider this carefully and consult with a financial planner. Your financial planner should be a friendly face with years of experience and industry know-how who understands you and your life goals. If you ask us, that sounds a lot like Hansford Bell!