Please could you explain how pension drawdown works? Instead of taking 25% tax-free lump sum in one go, is it possible to take a smaller amount tax free (e.g. 4% or 5%) per year over the course of several years, thus leaving part of the tax-free amount still invested until I need it? Am I allowed to switch pension provider once I am in drawdown?

I know the current age to access a SIPP is 55 years old and this is due to increase to 57 in 2028. If I retire early, is it also possible to withdraw a larger amount of taxable cash for few years and then reduce the amount I take from my SIPP as I become eligible to claim the state pension?

David

Tom Selby, AJ Bell Head of Retirement Policy, says:

Drawdown is simply a flexible way of accessing your pension pot while keeping your money invested for the long term. This allows you to build a retirement income plan to suit your needs and circumstances by tailoring your investments and withdrawals.

You can increase and decrease withdrawals in drawdown whenever you like, although you need to think carefully about the possible consequences of those decisions. In particular, you should make sure you aren’t taking too much, too quickly from your fund, as this runs the risk of leaving you short of money in your later years. Making large withdrawals from your drawdown fund could also see you pay more income tax than is necessary.

You can also switch your drawdown provider easily - you’ll just need to give your chosen provider a few details and they’ll do all the legwork for you.

Anyone choosing to enter drawdown needs to be comfortable taking investment risk and willing and able to engage with their retirement pot on a regular basis.

The other main retirement income option is buying a guaranteed income for life, known as an ‘annuity’, from an insurance company. This takes investment risk off the table, provides income security and means you don’t have to engage with your pension. Annuities are also inflexible and by locking into a product for life, you forgo the potential to benefit from long-term investment growth or vary your income as your circumstances change.

In addition to entering drawdown or buying an annuity, savers can take ad-hoc lump sums directly from their pension pot, with a quarter of each lump sum tax-free and the rest taxed in the same way as income. It is also possible to mix-and-match these different ways of accessing your pension.

As you mention in your question, you can access your pension from age 55 today, with that minimum access age set to rise to 57 in 2028. You also correctly identify that a quarter of your pension is usually available tax-free, with the maximum lifetime tax-free cash someone can take over their lifetime capped at £268,275 in most circumstances.

To access your tax-free cash, you need to choose a retirement income route. With a SIPP, it is possible to do this gradually - you don’t have to take all your tax-free cash immediately.

For example, someone with a £100,000 pension might want to access £5,000 of tax-free cash. They could do this by putting £15,000 into drawdown (there is no obligation to switch investments or take the money as income at this point), which would allow £5,000 (25% of the entire £20,000) to be withdrawn tax-free. The remaining £80,000, including the associated 25% tax-free cash entitlement (£20,000), would remain untouched, meaning the remaining tax-free cash entitlement has the potential to benefit from investment growth, along with the rest of the fund.

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?

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Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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