What is pension income drawdown and is it the right option for you?

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Kirsty Kerr

July 13, 2021

6 mins read

Flexible income (generally now known as drawdown) has become a very popular way to access pension savings since the Pension Freedoms regulations were introduced back in 2015. 

Here we answer some common questions to help you decide if it’s the right option for you. And if you’re a Standard Life pension customer, we’ll let you know how the process works and what to expect. 

1. When can I start taking money from my pension?

Currently you can start to take money from your pension plan from age 55 (or sometimes earlier if you’re in ill-health). Last year the government confirmed that this will rise to age 57 from 2028, and it may change again in the future.

2. How does drawdown work? 

You can take a flexible income or lump sums from your pension plan as and when you need to. You can stop, start, increase or decrease this at any time and the rest of your pension pot stays invested so it has the potential to grow in value. 

Remember, as your money remains invested, its value can go down as well as up and you may get back less than what was paid in. This means that if markets suddenly go down, as they did last year, then continuing to withdraw the same amount can have an impact on the future value of your pension pot. That's because when the value of your pension pot falls, the amount you take out becomes a larger proportion overall. 

You also need to be aware that, unlike buying an annuity, drawdown doesn’t provide you with a guaranteed income for life and your pension pot could run out. So you need to carefully plan the amount you choose to take and regularly review your investments. However, once you’re in drawdown, you can opt to buy an annuity at any time.

3. Who can move into drawdown with Standard Life?

Any Standard Life pension customer who is a UK resident can move into drawdown with Standard Life. You may need to transfer to a new pension product to access drawdown, however there’s no paperwork required and we don’t charge for this upgrade.

4. How and when can I take my tax-free cash?

You can usually take up to 25% of your total pension savings, across all pension plans, tax free. You can take as much or as little of this as you like, but you’ll be subject to income tax on any money you take beyond 25%.

You can also take all of your tax-free cash at once if you want, but that doesn’t mean you should. Remember that the longer your money stays invested inside your pension plan, the more potential it has to grow and the higher your overall tax-free amount could be. Of course, that’s not guaranteed.

Tax rules and legislation may change and your own individual circumstances, including where you live in the UK, will have an impact on your tax treatment.

5. Can I keep paying into my pension when I move into drawdown?

You can, and any new payments into your pension plan will continue to build up your tax-free cash amount. But once you take anything over this, the amount that can be paid into any of your pension plans, not just those with Standard Life, will be limited to £4,000 per tax year. This includes any contributions your employer makes on your behalf and is known as the Money Purchase Annual Allowance.

6. What happens to my pension plan that is in drawdown when I die?

When you die, any money remaining in your pension plan can be passed to people or causes you care about, commonly known as your beneficiaries. In most cases this will be free from inheritance tax as, unlike other savings, pensions don’t form part of your estate.

If you die before age 75, your beneficiaries can normally withdraw money from your pension tax free. If you die at or after 75, your beneficiaries can still withdraw money from your pension, but it will be taxed as part of their income.

It’s important to tell your pension provider(s) who you’d like your money to go to when you die and keep this information up to date. You can name and update beneficiaries online with some Standard Life pensions by logging in or using our app. Doing this allows us to take your wishes into consideration when we’re paying this money out.

For more information, read our recent article about passing your pension on to your loved ones.

7. How do I know if drawdown is right for me?

If you’re thinking about moving into drawdown, we’d always encourage you to think carefully about when and how you take your money. There’s a lot to consider so it’s a good idea to talk to a financial adviser before you make any decisions. There’s likely to be a cost for financial advice. If you don’t have an adviser, you can find one in your local area at unbiased.co.uk

You could also get free impartial guidance with Pension Wise, a service from MoneyHelper, if you're aged 50 or over. Go to their website or call 0800 138 3944. It's important to shop around and compare providers to get the best deal for you.

8. How can I move into drawdown with my Standard Life pension plan?

If you have a Standard Life pension plan and you do decide drawdown is the right option for you, you can arrange this online or over the phone and we’ll support you through the process. Typically it’ll take around a week for money to go into your bank account, but this can vary depending on what you’re invested in.

For the majority of customers, there are no additional charges for moving into drawdown with your Standard Life pension plan.

Some of our customers find it useful to transfer any other pension plans they have to their Standard Life pension plan first, so they have all of their pension savings in one place before deciding how much to withdraw. However, transferring won't be right for everyone. There's no guarantee you'll get more money as a result of transferring and you could lose money by giving up valuable guarantees or benefits. You can read our recent article for more information on combining your pensions

Want to know more about drawdown and the other options available?

If you’re looking for more information, have a look at the drawdown section of our website. It’s important that you explore all of your options for taking money from your pension savings as you might find one that better suits your needs. So this section of our website covers the pros and cons of moving into drawdown, and compares it to some of the other ways you can take money from your pension. 

The information here is based on our understanding in February 2021 and shouldn’t be taken as financial advice.

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