With a drawdown pot, anything you don’t spend in retirement can be passed onto loved ones when you die. You also have flexibility to take as much or as little as you like – which can help you keep your income below certain tax thresholds – and it gives you control over where your pension is invested. Because your money stays invested, your pot can keep growing as you take an income from it. ![]() The main advantage of a drawdown pension is the potential growth. What are the advantages of a drawdown pension? This is also taxed as income, so would eat up some of your personal allowance and make the money you drawdown less tax-efficient. How much you get depends on your national insurance record, but the full state pension is currently £10,600. Once you turn 66 (rising to 67 for those born after March 1960), you will also be able to claim the state pension. Remember that you don’t have to crystallise your whole pot all at once, so you could use your tax-free cash to provide you with more tax-free income each year if you don’t take it as a lump sum. Between £40,000 and £125,140 is taxed at 40 per cent, and anything above £125,140 is taxed at 45 per cent. You get the first £12,570 tax-free (your personal allowance), and then anything up to £40,000 is taxed at 20 per cent. What tax do you pay on a drawdown pension?Īny money you take from your drawdown pot will be taxed as income, the same way you are taxed on your earnings from work. They can map out your expenditure and recommend the right kind of investments for you and your retirement. It is worth speaking to a financial adviser about all of your options. If you wanted to solely live off the interest or “yield”, then your £300,000 pension pot would need to make 5 per cent a year if you needed to withdraw £15,000 yearly. If you had 3 per cent investment growth each year, your pot would last more like 30 years. It is worth looking at the numbers to see how much investment growth you need to ensure you do not run out of money.įor example, if you had a £300,000 drawdown pension and needed to take £15,000 a year from your pot, you would run out after 20 years without any investment growth. Others will also use any capital gains from investment growth to bolster their income, while some savers are happy to dig into their capital. Some savers try to ensure that their pension is sustainable throughout retirement by only taking the income generated by investments each year, without selling any of the actual investments. This is completely up to you, and will depend on your risk tolerance, how much income you need, how large your pension is and your decided income strategy. If you want to take all of your tax-free cash at once – the full £100,000 tax-free cash from the £400,000 pension pot – then you would have to crystallise your whole pension, and move the remaining £300,000 into drawdown (or an annuity). You can move more money across at a later date, taking 25 per cent tax-free each time. You could then take an income from this £75,000. You could then access £100,000, taking £25,000 as your 25 per cent tax-free lump sum and moving £75,000 of it into drawdown. ![]() For example, if you had a pension pot worth £400,000, you could keep £300,000 of it in your pension.
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