The Pension Drawdown Process
Flexi access Pension Drawdown is an increasingly popular retirement option. In this post, we discuss the pension drawdown process. What is involved and what timescales can you expect?
It is important to note Pension Drawdown only applies to defined contribution schemes (also known as money purchase schemes). Those with defined benefit or final salary pensions cannot access drawdown unless they first transfer out of their scheme to a personal pension arrangement.
Let’s assume you have traced all your pensions and you have the latest statements, terms and conditions. You have an estimate of your state pension entitlement and details of all your current assets. With this information in hand the basic process is as follows:
- Review your existing pensions.
- Build your retirement plan.
- Consider the tax implications.
- Decide on a pension provider and/or platform.
- Complete the relevant paperwork.
Check Your Existing Pensions
It is important to understand your current pension scheme (or schemes) terms and conditions. Some schemes offer valuable benefits that should not be given up without careful consideration.
Your existing pension schemes may offer a pension drawdown option. With others, you will need to transfer to another scheme to access drawdown. If it is necessary to transfer there may be fees and charges. The potential impact of those fees should be considered carefully, especially if you are nearing retirement.
Build A Retirement Plan
You may wish to use a financial adviser to help or you may take the DIY route. Whatever route you choose building a retirement plan is an important step.
An adviser will consider your personal circumstances and objectives and make a recommendation on the best way forward. If you decide to follow the DIY route there are various Government sponsored organisations that will provide guidance not advice on what you should do.
If taking advice there will, of course, be a cost involved. This should be measured against the potential loss if you make an error when taking on the task yourself. What really matters is not cost but value.
There are many issues to consider when building a plan. These include how far you are from retirement. What are your plans (if any) to increase your retirement fund? What income will you need in retirement? Do you hope to pass on remaining pension funds to beneficiaries on your death? Do you have any other assets that you can use to help fund your retirement? Each and everyone one of us will want to live our retirement in a different way, therefore it is important to ensure your retirement plan is tailored to your individual needs.
Pension drawdown is just one of the options available at retirement. The size of your pension fund could determine which options are worth consideration and which are not. You may choose a single option or a mix depending on your unique circumstances and plans for retirement.
Consider The Tax implications
It is important to manage your tax situation and plan appropriately. The last thing you need is to overpay tax that takes many months to reclaim. What follows only covers the most common tax considerations. There may be more to consider depending on individual circumstances.
When entering drawdown 25% of the pension fund value is available tax free. The remainder is crystalised and invested. From this invested pension fund a (taxable) income may be withdrawn to fund retirement.
Once income has been taken from a pension drawdown fund the amount you can continue to pay into a pension fund and receive tax relief drops to £4,000 each year. The Lifetime Allowance and Inheritance Tax implications should also be considered. Tax law can be complex, it can change, and it is best to take financial advice if in any doubt.
Decide On Pension Provider And/Or Platform
Your existing pension provider may offer a drawdown option. They may offer the best overall solution to match your circumstances but to assume so could be costly. It is important to compare your current provider against the rest of the market.
If you do move your pension to another provider there could be costs involved and they should be factored into your decision making process. You will need to find a platform that delivers the flexibility you require. You will then need to build a portfolio of investments in line with your attitude to investment risk taking account of your ability to absorb losses within the portfolio throughout your retirement.
Each option will have its own pros, cons and fee structure. It is important to ensure that whatever solution you choose meets your individual needs (refer back to your plan). Don’t pay for what you don’t need but remember the cheapest is often not the best over the long term.
Complete Relevant Paperwork
It is important to be prepared for an element of bureaucracy. Providers have an obligation to perform relevant checks. They will request information from you and there will be a number of forms to complete This process can take more time than you might expect. Of course, if employing an adviser they will explain everything and take on the administration tasks on your behalf.
Timescales To Complete The Drawdown Process
The process will almost certainly take longer than you expect. Assuming a retirement plan is in place and it is decided to move a pension fund to another provider then it can take between four and eight weeks to put a drawdown pension plan in place and secure a tax free sum.
We receive more questions on pension drawdown than any other retirement issue. It appears to us that pension drawdown is not well understood. Perhaps the Government and Pension providers should be doing more to help explain?
Should you have any questions then please give us a call or open a Chat and we will be happy to help. For a call back complete the form below or email us at letstalk@fathomfinancial.co.uk and one of our team will respond as soon as possible.
This blog is intended to provide a general review of certain topics and its purpose is to inform but NOT to recommend or support any specific investment or course of action. The past is not a guide to future performance. The value of investments can go down as well as up and you may not get back the full amount you invested. Tax and financial regulations can change. Any figures quoted above are correct at the date of publication.
