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Pensions - income drawdown

This advice applies to Northern Ireland

One of the options for taking your pension is to leave some of the money invested and take part of it as income. This is called income drawdown or income withdrawal.

This page explains how income drawdown works, who it's suitable for and how you can decide whether it's the right choice for you.

Get help with Pension Wise

Pension Wise is a free and impartial service to help you understand what your pension options are.

Find out more at www.pensionwise.gov.uk.

About pensions income drawdown

This information is for people who have a 'defined contribution' pension. 'Defined contribution' pensions are built up over time by you or your employer making regular payments into it. The total amount of money you have for your retirement depends on how much was paid into the pot and how the fund's investment performed. Check with your pension provider if you're not sure what type of pension you have.

You'll have a choice to make about how to get an income from your pension.

One of your options is to leave some of your pension fund invested and take only part of it as income. You can either:

  • draw money from the pension fund itself to give you an income. This is called income drawdown or income withdrawal, or
  • use some of the money from the pension fund to buy a series of short-term annuities to give you an income.

► Find out more about your options for taking your pension money.

How income drawdown works

Income drawdown is a way of getting pension income when you retire while allowing your pension fund to keep on growing. Instead of using all the money in your pension fund to buy an annuity, you leave your money invested and take a regular income direct from the fund.

If your investments do well, your pension fund can carry on growing which means your retirement income will increase too. But remember, the value of your income could also go down if your investments do badly.

How much can you get from your pension fund

There is no limit on how much money you can take out of your pension fund each year.

The money in your pension fund needs to carry on growing to replace what you are taking out. So you'll need your fund to be wisely invested to make sure you don't lose out. Make sure you get independent financial advice from a professional to help you make good decisions about using your pension fund and how it's invested.

For more information about where to get advice about your pension, see Getting financial advice.

You can get more information about withdrawing income from your pension fund from the Money Advice Service website at: www.moneyadviceservice.org.uk.

What income drawdown costs

Income drawdown can be an expensive option. There will be ongoing charges for managing your investments. Rules set by HM Revenue and Customs mean that the amount of income you take out of your pension fund has to be reviewed regularly. There are charges for this as well.

Make sure you are aware of how much income drawdown will cost you when you are deciding on this option. You will have to make sure that the investments grow enough to cover the extra costs.

When is income drawdown a good option?

Income drawdown can be useful if you're not ready to take all of your pension straightaway, for example where you're planning to carry on working part-time.

However, income drawdown is really only suitable if you're happy to leave your pension fund invested in the stock market so that it has a reasonable chance of growing. This makes income drawdown a high risk choice because the stock market can go up or down. You could end up with far less income than you've planned for.

For this reason, you'll probably only want to consider income drawdown if you have a large (six figure) pension fund or you'll have enough other regular income during your retirement. For example, you might have income from other savings or investments.

If you have a workplace money purchase pension and want to take the income drawdown option, some providers might insist you change your pension to a personal pension. You may need to take financial advice to see if this is a good option for you.

For more information about workplace money purchase pensions, see Workplace pensions.

For more information about finding an indepenedent financial adviser, see Getting financial advice.

What happens to your pension fund when you die

From 6 April 2015, the 'death tax' on pension funds was scrapped. This means if you die before age 75 with all or some of your pension fund still invested, it will pass to your beneficiaries tax-free.

If you're 75 or over when you die, your beneficiaries can either draw money from the pension as an income, or take the fund as a lump sum. Both options will be taxed.

These changes apply to payments made on or after 6 April 2015, rather than to deaths on or after 6 April 2015.

An independent financial adviser can help you decide what's the best way for you to provide for family and friends after you die.

For more information about where to get advice about your pension options, see Getting financial advice.

Other ways of taking your pension

You have a number of other options for how to access the money in your pension pot:

  • take some or all of your pension pot as a cash lump sum, no matter what size it is
  • buy an annuity - you can take a cash lump sum too
  • a mix of all options, including income drawdown.

It’s important to know the different tax rules for each option.

Choosing the best way to use your pension fund is complicated. Before you finally decide on income withdrawal or on what annuity to buy, you should get independent financial advice from a professional adviser so that you make the best choice for your situation.

Pension scams

Pension scams have become more common since April 2015, when new rules allowed people to take some or all of their pension pot as a lump sum. These scams are fake investments designed to con you out of your money. They are often extremely convincing and anyone can be caught out.

Find out about scams and what to watch for at Pension Wise: https://www.pensionwise.gov.uk

Get help with Pension Wise

Pension Wise is a free and impartial service to help you understand what your pension options are.

You can find out about your options at www.pensionwise.gov.uk.

Booking an appointment with a pensions guidance specialist

You can book a free appointment with a pensions guidance specialist who will talk through your pension options with you. Appointments will be either over the phone or face to face with specialists from The Pensions Advisory Service and Citizens Advice.

An appointment will be relevant to you if:

  • you have a defined contribution pension pot
  • you're approaching retirement or 50 or over 

Visit the Pension Wise website to book an appointment, or call 030 0330 1001 between 8am and 10pm, Monday to Sunday. You can also book an appointment by visiting your local Citizens Advice Bureau.

Further help and information

The Money Advice Service

The Money Advice Service is a free, independent service. Their website has lots of useful information about pensions including comparison tables for choosing a personal pension provider and a pension calculator for working out how much pension you'll need. There's also a range of leaflets to help answer your pensions and retirement questions.

Go to: www.moneyadviceservice.org.uk.

The Pensions Advisory Service

Helpline: 0300 123 1047
Website: www.pensionsadvisoryservice.org.uk

The Pensions Advisory Service is an independent organisation that provides free information, advice and guidance about all types of pensions including state retirement pension, company, personal and stakeholder schemes.

TPAS doesn't provide financial or investment advice or recommend products.

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