Are you looking to access money in your pension?
Both novice and experienced investors seek advice from us when they want to start drawing on their retirement funds. Drawing money down is a big decision, and we provide our clients with personalised support whatever their stage in life.
What is pension drawdown?
In simple terms pension drawdown (also known as Flexi Access Drawdown) allows you to withdraw up to 25% of your retirement fund as tax-free cash, and to also withdraw an income in exactly the manner that is suitable for your specific circumstances.
When it comes to drawdown, there are 2 ways of accessing your money before you officially retire.
- You can take up to 25% as a lump sum without incurring any taxation
- You can access more of your pension pot with staged withdrawals of smaller sums of 25% of the amount moved into drawdown only as opposed to 25% of the whole pot.
A tax-free lump sumWhen we work with you to crystallise your retirement funds and to set up or transfer them to a pension drawdown account, you are entitled to take 25% as a lump sum after the age of 55.This money does not count towards the personal allowance, so it can be a tax efficient way to access any funds you need for immediate use or to purchase an annuity.
Staged withdrawalBy helping you access staged tax-free cash we can manage your portfolio in a way that allows you to withdraw a smaller amount of tax free cash each year. This withdrawal can be paid to meet your expenditure needs and this in turn puts less pressure on the overall fund, as the amount paid is tax free, whereas if an income were taken this would be potentially taxed and therefore a higher gross amount would need to be paid each year to meet expenditure.We would normally recommend this strategy for clients who have no need for a large chunk of cash in one go (for instance their mortgage is often fully paid off and they already have a safety net in the form of cash reserves). In this instance it may be beneficial to take tax-free cash in stages over a number of years.
Growing your pensionChoosing a FAD account isn’t just about taking your money out. It’s about flexibility and autonomy.
You may choose to use your account to continue to grow your retirement pot. At Accudo Investments we would put together an investment portfolio whose range of investments would be slightly more weighted towards yield rather than growth. This way your account will accumulate more cash to meet any withdrawals that you need in the future or to provide you with a regular taxable income after you have stopped working.
Whether you action a pension drawdown or not, you can be confident that our relatively defensive investment approach will always place the emphasis on achieving the necessary growth to ensure capital preservation and your personal income needs.
What are the advantages of pension drawdown?
Flexibility: Unlike an annuity, any remaining funds can be passed to your spouse, children or any other beneficiaries upon your death.
Tax Efficiency: The generous taxation relief during the accumulation phase of your retirement fund, as well as the fact that retirement funds are outside of the estate for inheritance tax purposes (and therefore not liable to inheritance levies except in exceptional circumstances), has led to pensions largely being seen as one of the most tax efficient methods of saving and investing.
What are the disadvantages of pension drawdown?
We are committed to our role as independent consultants, and we will always base our advice on your personal circumstances. Opting to take income via drawdown from your retirement fund is not in everybody’s interest, and if it is not suitable for you then we will tell you and steer you towards options that are more appropriate.
Limited Funds: An annuity is guaranteed for your lifetime but pension income drawdown is not. The funds can run out if too much money is withdrawn. For this reason small retirement pots are not suitable for pension drawdown.
Investment Risk Whilst our expert team will carefully manage your investment portfolio, the funds are essentially still tied to the performance of the markets. These can go down as well as up, so if you are not comfortable with an element of managed risk then an annuity would be a much safer option for you.
Case Study Withdrawing a Lump SumMrs Smith, aged 63, approached Accudo Investments about accessing some of her retirement funds to pay for her daughter’s university fees.
- £100,000 in a personal pension
- Wants to draw £25,000 to give to her daughter
- Doesn’t require any income yet.
Drawing Down a Staged Income
Mr Parker, aged 56, came to us for advice about retirement planning.
- Combined Pension Plans for Mr John Parker £800,000 and none for Mrs Parker
- Home worth £600,000 with no mortgage
- Savings Account worth £50,000 and a Current Account worth £5,000.
Together we helped him establish that the income he and his wife would need per annum is £30,000 NET.
One potential strategy would be to crystallise 1/10th of the fund each year over the next 10 years until state retirement age, to take tranches of tax-free cash. Thus the anticipated income streams would be as follows:
Year 1-10 (assuming zero growth in the fund and zero growth in the personal allowance band*)
- £20,000 tax-free cash (i.e. 25% of £80,000 being 1/10th of the fund crystallised)
- £10,000 withdrawn as income and received tax free, as this is within the personal allowance.
Total Net Income £30,000
Year 10 onwards
At this point the state pension would commence for John of approximately £8,500 in today’s terms. Assuming the income requirement is still £30,000 net in today’s terms, this means a further £21,500 net (£25,000 gross assuming the personal allowance is still £12,500 in today’s terms and John is a basic rate taxpayer) would need to be withdrawn as income.