The term ‘drawdown’ crops up a lot in relation to pensions and retirement. So, what is it and how does it work? Quite simply, drawdown allows you to leave your money in your pension pot and take regular income or lump sums whenever you want.
The money left in your pension pot remains invested. This gives your savings the chance to grow. But the value of your pension pot could also fall, so you may get back less than you invest. How long your pension savings last, will depend on a few factors. How much you’ve saved. How much income you want to take and the performance of your investments. After all, you might need your pension to last for 20 years or more.
So, deciding how much to take out when you start drawing on your pension is important. Then,it's best to keep it under careful review. As, unless you have other sources of income, you want your pension to last your lifetime. And remember, you don’t have to take any income if you don’t want to.
The main advantage of drawdown is that you’re in control of your money - as it allows you to take out the amount you want, when you want it.
You can access your pension from the age of 55 – although this changes to 57 from 2028. You can also make further contributions and choose where to invest your pension, as long as you don’t take more than your 25% tax-free cash amount.
Once you take out more, then there is an annual limit as to the amount you can contribute. There are some caveats though. Any cash you take as drawdown reduces the amount of money you have left in the pot to take as income. If you take too much income, you could run out of pension money.
Finally, the value of your pension pot could drop too, if you don’t keep an eye on investment performance. This is why you need to be clear about your retirement goals. Once you understand these, you can choose the right investments to help try to meet them.
It’s important that your pension works hard for you as long as you need it. That’s why it’s worth understanding what drawdown means and how it works. We've talked through the basics, but if you're looking to take positive pensions steps, it may be sensible to find out more about it. The government’s Pension Wise service offers free, impartial guidance to help you understand your options at retirement. And you could also talk to an authorised financial adviser before making a decision.
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