What is Drawdown?

Published on August 12, 2016 by Andrew

What exactly is a Drawdown Pension

Drawdown is a method of attaining greater flexibility using pension capital. When you move your cash into drawdown, you are permitted to take 25% as a lump sum payment, and that is free from tax. The remainder carries on being an investment, with taxable income capable of being drawn directly from your pension any time you choose. The tax-free lump sum payment has to be taken at the beginning, but because you don’t need to move your entire pension immediately, numerous lump sums could possibly be taken.

An additional attractive function of drawdown is the increased flexibility it enables you in receiving your pension. You may select regular withdrawals each month, every quarter, biannually or on a yearly basis, along with the option to take one-off lump sums or take a break from receiving income any time you like. Whatever is left following your death may be given to beneficiaries chosen by you.

With regards to withdrawals, a lot of people elect to only take the ‘natural yield’ – the income their investments produce, which may come from funds, stocks or corporate bonds. Another way is ‘drawing on capital’, this involves the sale of investments to produce cash that can be withdrawn. Should you take in excess of the amount your pension is growing by, however, the capital value of your pension will go down over time.

An important facet of drawdown that’s important to bear in mind is it doesn’t provide you with the secure income that other types of pensions do, for example an annuity. Your cash could be used up if you live longer than you originally anticipated, you take too much, or the investments you selected underperform your expectations.

Just like any type of investment, there’s a degree of risk with drawdown. You will see variations in returns over time, and you could end up getting back less than the total amount you invested. Whether drawdown meets your needs ultimately is dependent on how you compare the advantages of greater flexibility versus the risks of investment along with the potential for running out of cash.

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