Pension drawdown is a flexible way of taking retirement income from your pension. The process was introduced after the pension freedom rules in April 2015. Before that, the government limited how much you could take from your pension – unless you had other sources of income.
What Is Pension Drawdown?
Once you reach the age of 55, you can take up to 25% of your retirement income completely tax-free.
These days, you can take as much or as little as you want from your pension funds. What liberty!
Of course, with great power comes great responsibility. There are tax consequences to consider when withdrawing large amounts. We’ll talk you through the specifics below.
Want greater flexibility in accessing your pension funds?
Flexible retirement income is often referred to as pension drawdown. This is a way of taking money out of your pension pot to live on in retirement. It can give you more flexibility over how and when you receive your pension.
Depending on your income requirements, this could be the best option for you.
Get to grips with your retirement income
Chatting to an expert well before retirement will help you get to grips with your financial situation. A clear understanding of your income requirements will highlight how much you need to invest. In turn, you’ll gain a better idea of how to access your money in a way that suits your long-term financial goals.
Specific tax implications to consider
When accessing from your pension, there are specific tax implications to bear in mind:
- Once you reach 55, you can take up to 25% of your pension completely tax-free.
- You don’t have to take the full 25% in one go – many choose to drip their tax-free cash out slowly.
- Taking your cash out slowly will allow you to benefit from continued growth in the remaining pension, while regularly accessing a portion of your tax-free cash. Talk about tax efficiency!
Crystallised vs uncrystallised pension
Your pension becomes crystallised when you:
- Take a tax-free lump sum from it Set up a drawdown scheme
- Buy an annuity
An uncrystallised pension lump sum is when you take money from a pension pot that hasn’t previously been accessed in any of these ways.
Withdrawals from your pension
Uncrystallised pension lump sum rules come into play when withdrawing from your pension:
- Only 25% of each withdrawal is paid tax-free.
- Any withdrawals from your pension (excluding the tax-free cash) are taxed at your marginal income rate.
As such, you must proceed with caution. Before taking a lump sum from your pension, check it won’t push you into a higher tax band.
Getting professional advice will let you build assets within multiple tax vehicles alongside your pension. This will help you to reduce tax burden and manage your tax obligations.
Ready to discuss your retirement goals?
Pension drawdown lets you access your money as and when needed (within specific tax rules – and as long as your pension scheme supports flexi-access drawdown). To make sense of it all, get some straight talking advice around your retirement goals and get a plan in place.
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