Income drawdown is one of the ways in recent years which the UK government has tried to introduce more flexibility to your pension – via Pension Freedom. Pension Freedom seeks to provide you with more options for your pension.
This does not constitute advice and advice should be sought in all instances before acting on it.
Income drawdown lets you draw a regular retirement income from your pension pot and the rest of your pension savings are reinvested in funds created for this very purpose.
Your return depends entirely on how well the fund performs. It’s a viable option for those planning to retire at or before their regularly scheduled retirement age and is an alternative to purchasing an annuity.
Understanding income drawdown and other pension options is important for dental and medical professionals – from the perspective of both an employer or an employee – as retirement planning is vital on a personal and professional level.
How it works
If you chose to take your pension as a lump sum, you will only get about 25% of your total pension pot. The remainder can be moved to a different fund that provides an income when you need it.
It can be used as your regular income but the amount you receive largely depends on your investments, so don’t be surprised if your instalments change from time to time.
While there isn’t a limit to how many withdrawals you can make, it’s important to remember these are now subject to Income Tax at your highest marginal rate. If you don’t plan carefully, your withdrawals may raise your income. Then you risk moving into a higher tax bracket and chance an unexpectedly large tax bill.
If you used income drawdown before Pension Freedom debuted, you needed to buy a product that provided you with this option. Now, however, those 55+-year olds are able to access their accounts easily and often – that is if you can actually find a pension scheme that builds in this extra. The reality is you may have to purchase an entirely separate product if you want flexibility in your pension plan.
Flexible vs Capped
There are two types of income drawdown products you will come across. A flexi-access drawdown does not limit the amount of income you can take from your drawdown funds. This type of drawdown plan came into effect in April 2015.
A capped drawdown, on the other hand, restricts the income you are able to take out and is no longer available.
However, if you are already on one of these plans, as of the cutoff (April 2015) you should be aware that while your plan will continue to operate under its prevailing rules, the tax relief you can apply toward future pensions savings will decrease if you exceed the drawdown ‘cap’.
Getting the most out of your retirement
Amongst all your other options for retirement products, you may be lucky enough to find a provider that combines income drawdown with other features, sweetening the pot with promises about income and growth.
Income drawdown is just one of the pieces in your retirement puzzle, but if you’re interested in a pension scheme with it, it may be difficult to find the best plan on your own.
To be sure you end up with the right plan, you should be working with an expert financial adviser.
At Dental and Medical Financial Services we provide advice based on your full financial picture, including your retirement goals. We’ll ensure your choices today will set you up for a carefree tomorrow.
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