If you\u2019re approaching retirement, you may have started thinking about how you will use your pension pot. Should you buy an annuity or should you consider arranging a pension drawdown?<\/p>
In this guide, we take a look at everything you need to know about pension drawdown. We also answer common questions like \u201cAre there any alternatives to a pension drawdown?\u201d and \u201cWhat are the pros and cons of pension drawdown?\u201d.<\/p>
Pension drawdown, sometimes called income drawdown, is a way of withdrawing your pension savings to give you a flexible retirement income. It\u2019s an alternative to arranging an annuity where you use your pension pot to buy a guaranteed income for a set period.<\/p>
With pension drawdown, your pension stays invested and you gradually withdraw an income. This can be done on a flexible basis, sometimes withdrawing more income than at other times.<\/p>
Because your pension pot stays invested it means that your pension pot can carry on growing over time. However, there is the risk that your pension will go down in value if your investments do badly.<\/p>
Pension drawdown works by gradually withdrawing money from your pension pot. The rest of the pension pot remains invested. The income drawdown works like this:<\/p>
Even if your current provider offers income drawdown, it\u2019s worth considering transferring your pension to another provider. Drawdown fees and the choice of funds vary significantly between pension providers, so your existing pension company might not be the best option for you.<\/p>
Check with a financial adviser that you won\u2019t lose any valuable guarantees or have to pay charges if you transfer your pension.<\/p>
You can arrange an income drawdown with your current pension provider or a different pension company. It\u2019s a good idea to shop around as fees and charges vary between pension providers.<\/p>
When you\u2019re comparing pension providers, you should consider the following:<\/p>
Pension providers charge various fees and charges to cover their costs and make money on their pension schemes. If your pension has entered the drawdown phase, then you may be charged the following:<\/p>
It\u2019s important to get advice on your pension drawdown options. That\u2019s because it\u2019s a big financial decision that will affect your retirement income for many years in the future.<\/p>
A financial adviser will look at all your circumstances, your attitude to risk and your financial goals before advising you on the best option. For example, if you would prefer a guaranteed income in retirement, then buying an annuity may be a better option for you than income drawdown.<\/p>
There are 2 main types of drawdown pension:<\/p>
The performance of your drawdown pension depends on the growth of the funds you have chosen and the fees charged on your pension. Higher pension fees will eat into your pension wealth.<\/p>
The best drawdown pension provider in 2021 is Vanguard, according to research by the Times Newspaper. They found that Vanguard has very low charges, no additional SIPP admin fee, no set-up charges, annual admin fee or account closure fees. Vanguard also has a free drawdown set-up and withdrawing your pension is free.<\/p>
According to research by the Times Newspaper, the best drawdown pension providers in 2024 are Vanguard, Aviva, interactive investor and AJ Bell.<\/p>
The first 25% of your pension drawdown will be tax free. The remaining 75% of your pension is classed as taxable income just like other types of income. All your income is added together to give your total taxable income and is taxed at the following rates:<\/p>