Pension drawdown

Drawdown - a flexible way to access your pension

Pension drawdown

Drawdown is a flexible way to access your pension – you choose how to invest it and what income to take and when.

What is pension drawdown?

If you put your pension fund into drawdown, you can also withdraw a tax free lump sum. The rest of the fund remains invested for you to take a retirement income from. At any time you can use some or all of the drawdown fund to buy an annuity. If you are 55 or over and don’t need a secure income a drawdown fund can be a good way of maximising returns from your pension savings. Of course, the investments might not perform as well as you want and if you take too much income out of the fund there may not be enough left for your needs as you get older. Any remaining drawdown fund when you die can be passed on to your beneficiaries as a lump sum, income, or a combination of the two.

Pension drawdown is also known as income drawdown, and two types of pension drawdown are flexi-access drawdown and capped drawdown.

How does pension drawdown work?

First, your pension needs to be with a provider that offers drawdown. Our SIPP gives you a range of options to flexibly access your pension. Find out more about consolidating your pension pots into a SIPP. Transferring a pension from an existing scheme may not always work to your benefit and if in doubt you should consult a suitably qualified financial adviser.

Next, decide how much of your pension you want to move into drawdown. You don’t have to put the whole of your fund into drawdown at one time and you can mix and match your options – setting up a drawdown fund with part of it and using the rest to provide a secure income through an annuity, for example. A lot will depend on how much income you need at different times in the future and what other income sources you have.

25% of the amount you are accessing can normally be taken as tax free cash. Whether you need access to cash or how much you need will often determine how much of your fund you put into drawdown. If you don’t need the cash at the moment you might consider leaving the fund invested or not putting all of the fund into drawdown.

Lastly, you need to decide how much income you want to take, if any, and at what frequency.

How much income can I take from my pension pot?

You can take as much or as little income as you want from your drawdown fund – it’s completely up to you. Income from your SIPP can be paid on a regular basis – monthly, quarterly, half-yearly or annually – or as one-off amounts. However, you need to consider how long you want your retirement income to last and make sure that the level of income you have taken doesn’t mean that you are going to be short of money later on. Income can be varied at any time and the cash needs to be available in your SIPP to pay the income to you. Your pension will be paid into your nominated bank account and you will be sent a payslip in the post.

If you want to take income from your pension fund for the first time then read our SIPP benefits guide and complete the SIPP benefits form – income drawdown and lump sum payments. If you want to change the amount of your regular income or take a one-off payment from your drawdown fund then instruct us online by logging in and visiting the ‘Manage your pension’ area. 

See our charges and rates for details of the charges we make for drawdown.

How is drawdown income taxed?

Once the tax free lump sum has been taken, income from the drawdown fund is taxed as income tax. It is added to any income you have from other sources in the tax year for calculating the rate and amount of tax to be paid.

If you withdraw too much income you may find that you have been pushed into a higher income bracket and end up paying tax at higher rates.

When a pension income is first paid, it is likely that an emergency tax code will be used. To find out more see the pensions and tax section.

When you first take income from your drawdown fund the amount of pension contributions you can pay will be limited to the money purchase annual allowance (MPAA) of £10,000 per year. This restriction does not apply if you take income under capped drawdown.

Benefits of drawdown Risks of drawdown
  • Pension fund remains invested
    Your pension remains invested and can benefit from any capital growth and investment income, although the value of investments can go up as well as down and you will need to monitor your investments regularly
  • Pension fund falls in value
    As your pension fund remains invested, your investments may not do well and the value of the fund could fall, leaving you with less money than you need in your retirement
  • You are in control
    You control what investments you hold and can manage your portfolio to suit your appetite for risk and income needs
  • Managing your investments
    In later life you may not be able to carry on managing your own investments and unless you have appointed someone else to manage it for you your investments could suffer and the income available could be reduced
  • Flexibility over payments
    You choose when to take pension income and how much you take. Provided you have considered how much you will need in the longer term, you can take income to meet immediate cash needs or leave money invested in the fund if you don’t need it now
  • Pension fund withdrawals
    If you take too much income from your fund you may not have enough to support yourself later on.  If the income you take puts you into the next tax bracket you may end up paying more tax than you had intended. Your pension income may also impact any means test benefits you receive
  • Pension fund passed on in death
    Your fund will be available for your beneficiaries when you die, as a lump sum, an income, or a combination of the two, and it will normally be free from inheritance tax – see What happens to my SIPP when I die?
  • Future pension contributions
    When you go into drawdown the amount you can contribute to your pension reduces

Capped drawdown

If you went into drawdown on or before 5 April 2015 and have not converted to flexi-access drawdown you will be in capped drawdown and subject to a limit on the maximum amount you can take as income from your drawdown fund. This is the GAD (Government Actuary’s Department) limit and is roughly 150% of the annual income you would receive from a basic annuity based on the value of your fund. This limit is reviewed every three years and annually after age 75.

Although capped drawdown restricts the amount of income you can take, if you stay within the GAD limits, your contributions are not restricted as they are for flexi-access drawdown.

If you do want to move to flexi-access drawdown then see Switch from capped to flexi-access drawdown

Case study: Brenda Jackson aged 65 is planning to retire

Brenda

Brenda has a SIPP worth £1m and no other retirement savings. She plans to retire in December 2016 and is keen to pay off her £200,000 mortgage and buy a new car when she retires.
She decides to access her whole fund and takes £250,000 (25%) as a tax free lump sum which she uses to pay off her mortgage and buy a car, and puts the balance into flexi-access drawdown.

Mrs Jackson’s earnings mean that she is paying higher rate tax in the tax year 2016/17. As she does not want to pay higher rate tax on her pension she decides to wait until April 2017 before taking any drawdown income.

In April 2017 she decides to take an income of £35,000 a year so that she only pays basic rate tax – she also receives a state pension of £6,000 a year. Given the size of her drawdown fund (£750,000), Mrs Jackson hopes that this level of pension (under 5%) is sustainable, but she will have to review this on a regular basis, taking into account investment performance.

Watch out for pension scams.

Find out moreBe aware if you are approached by email, phone, text or in person about withdrawing your pension pot.

Open a multi-award winning SIPP

More on SIPPsOpen an account

Transfer to us

  • £500 towards cost of transferring
  • Deal from just £1.50
  • Award winning service
Find out more