What is pension drawdown?
With pension drawdown you can take regular or ad hoc income payments directly from your pension pot. This means you keep control over your pension pot and have the flexibility to spend and invest your pension pot as you want.
It is important to remember, unlike an annuity, your income is not normally guaranteed and if you take too much income in the early years or if the fund does not increase in value as planned, you could end up with a lower income or even run out of money entirely.
The case for drawdown
Pension drawdown has become more popular and accessible following the 2015 pension freedoms and the case for drawdown is strongest when flexibility and control and is more important than guaranteed income.
There are many situations when drawdown might be the best solution including:
- In the early period of retirement when annuities may be considered poor value and it may too early to lock into an annuity
- Where income flexibility is needed
- For those who are prepared and able to take the risks associated with drawdown
- in order to leave an inheritance for the family
Advantages & disadvantages
Investing for drawdown is very different from investing when you are saving. There are still the risks associated with investing in the stock market but in addition there are two other important risks:
- Sequence of returns risk
- mortality drag
What to look for when considering drawdown plans
There are a lot moving parts in a drawdown plan and when comparing different drawdown plans you take the following into consideration:
- Product features – although most drawdown have all the necessary features, it is important to check whether they have the options you need e.g. option for phasing and
- Suitable range of investments
- Competitive charges
- Any special tools and resources
- The review process