If you have a personal or workplace pension, you can start accessing your savings from age 55, rising to 57 from April 2028. There are a few ways you can access your pension money. One way to to do this with Moneybox is with our drawdown service.
Pension drawdown is a flexible way to take income from your pension pot while keeping the rest invested. When you reach retirement age, you generally have three main ways to access your pension: buying an annuity for a guaranteed income, taking lump sums as and when you need them, or using pension drawdown to keep your money invested while taking a flexible income. Each option offers different levels of security and flexibility.
As you approach retirement, understanding your options is vital for long-term financial peace of mind. Drawdown offers the opportunity to begin accessing their savings from age 55 (rising to 57 in 2028), providing a flexible way to fund your lifestyle alongside other income sources like the State Pension.
How does pension drawdown work?
When you reach the minimum pension age, you can usually take up to 25% of your pension as a tax-free lump sum. It is important to note that this 25% limit applies to the total value of your pension pot. You could choose to take it all at once, or leave it invested and take smaller tax-free amounts over time.
For example, if you had a £100,000 pension pot, you wouldn’t pay any tax when you withdraw up to £25,000. You would then pay Income Tax when withdrawing any of the remaining £75,000.
The remaining 75% can stay invested in your pension provider’s fundsFunds, also called ‘tracker funds’, are financial instruments that have been set up to match or ‘track’ the price of a market index. Investing in a fund lets you get exposure to different financial assets like shares and bonds, without having to buy them directly.. From this invested pot, you could:
- Take a regular income: For example, setting up a monthly payment of £500 to help cover your utility bills or groceries.
- Take ad-hoc lump sums: For instance, withdrawing £5,000 for a one-off cost like a special anniversary trip or home repairs.
- Leave it to grow: Keeping the money invested gives it the chance to potentially benefit from market growth over the long term.
Why consider drawdown?
Drawdown can offer:
- Control: You decide exactly how much you withdraw and when.
- Tax efficiency: You only pay Income Tax on the money you withdraw beyond your tax-free allowance.
- Legacy planning: If you pass away, any remaining funds in your pension can usually be passed to your beneficiaries.
- Investment potential: Because your money stays invested, it has the chance to continue growing throughout your retirement.
Important considerations for your strategy
While the flexibility is empowering, drawdown requires active management. Because your money remains in the market, its value will fluctuate.
Market risk
If the investments in your pot perform poorly, your pension balance could drop. For example, if the stock marketThe global network of stock exchanges that lets investors buy and sell shares in publicly listed companies. falls by 10%, the value of your invested pot would also decrease, which might mean you need to reduce your withdrawals to last for the rest of your retirement.
Longevity risk
Unlike an annuity, drawdown is not guaranteed for life. If you withdraw too much too soon, or if your investments do not perform as expected, you could run out of money in later life.
Regular reviews
Managing a drawdown pot is an ongoing process. You will need to review your investment choices and withdrawal rates regularly to ensure your money lasts as long as you need it to.
If you’re unsure how to manage these risks or regularly review your choices, you may benefit from speaking with a financial adviser.
The 25% tax-free lump sum
You do not have to take your entire tax-free lump sum at once. Some people choose a phased drawdown.
Imagine you have a £100,000 pot. Instead of taking the full £25,000 tax-free immediately, you could move £10,000 into drawdown. This would give you £2,500 tax-free and leave £7,500 invested to provide taxable income.
Is drawdown right for you?
Drawdown offers freedom and possibility. Unlike an annuity, which provides a guaranteed income for life, drawdown allows you to withdraw money as and when you need it. But it isn’t for everyone.
Drawdown suits those who are comfortable with some investment risk and want to stay involved in their financial planning. If you prioritise a guaranteed, “set and forget” income, an annuity could be a more reassuring option.
You can also choose a mix of options – using an annuity to cover essential bills, lump sumps to pay for one-off costs like home improvements or a new car, and drawdown for more flexible spending.
It’s important to work out what’s right for you, but you can seek free guidance from Pension Wise or advice from a financial adviser if you’re still unsure.
As with all investing, your capital is at risk. The value of your pension can go up and down, and you may get back less than you invest. Tax treatment depends on individual circumstances and may be subject to change in the future.You can only access your pension once you reach the minimum pension age.
When deciding whether to transfer your pension, it’s important to compare the charges, investment options & benefits between Moneybox and your existing provider. If you’re not sure whether transferring is right for you, we recommend you speak with an independent financial advisor.
Taking benefits from your pension is a significant financial decision. We strongly recommend seeking free guidance from Pension Wise or advice from a financial adviser before making a choice.
There are a number of ways to withdraw from your pension at retirement, but not all of these options are currently offered by the Moneybox Pension. When weighing up your retirement choices, it is important to consider the specific benefits, risks, and charges associated with each method. You should compare products offered by other providers on the open market, as they may offer features or lower costs that are more suitable for your individual needs.