Income Drawdown

The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.

Introduction

You control where you invest your fund, how much income you take, how much tax-free cash you take and when you take it – and you could leave something behind for your dependants. Please be aware that any inncome or tax-free cash you take from your pension fund must be within limits set by the government. You also need to be age 55 or over to take your tax-free cash or any income.

It is designed to help you manage your income through the various stages of your retirement, while giving you the potential for investment growth.

The self -invested option is likely to appeal to those who like to take control of their retirement planning, and want more choice than a conventional personal pension can offer.

So you can make the right decision about what is right for your needs, it is a good idea to talk to us.

If you make regular withdrawals from income drawdown over many years, you are vulnerable to ‘sequence risk’.  This is the risk that your capital sum runs out more quickly because, in the ‘sequence’ of good and bad investment years, you experience bad years first.  Two investors with exactly the same average long term annual return can have very different experiences because of sequence risk.  The person who goes through bad years first may run out of money long before an investor with exactly the same average return but with good years first as the withdrawals have a greater impact on the fund.

One way we can mitigate the effects of this is to ensure that we carefully monitor your withdrawals at any future meetings and the subsequent effect that they are having on your remaining capital. 

 

WARNING – THE POTENTIAL FOR A HIGH INCOME TAX BILL AND EMERGENCY TAX

The most publicised feature of pensions flexibility is the ability for individuals to draw out their entire fund as lump sum with 75% subject to tax.  We feel strongly that this course of action would not be sensible for the vast majority of our clients, because:

  • ‌It could potentially result in very large tax bill arising, if it’s taken in just one or over a small number of tax years.

  • ‌This approach wouldn’t allow for a sustainable income to be provided in later years.

  • ‌The money will be removed from a near “tax perfect” pension environment.  It is difficult to see where the money could otherwise be invested that would be as favourable as the pension environment from which it came.

Any withdrawal of funds in excess of your 25% tax free lump sum are subject to income tax at your individual marginal rate of tax.  The pension provider may not be aware of your income tax situation and will normally tax your withdrawal on what is known as an Emergency Month 1 tax code.  This will never accurately deduct the right amount of tax and depending on the size of the withdrawal, will likely result in an overpayment which will need to be reclaimed by HMRC.  You will need to reclaim any overpaid tax via your self-assessment or the relevant HMRC form. You may have to wait until the end of the current tax year to receive your refund. I recommend you speak to an accountant to clarify your exact tax position as this is a specialist area on which I am not able to advise.

Reviews

One of the keys to successful retirement planning is to regularly review all your pensions, regardless of whether you are still contributing. Thousands of pension customers have preserved benefits that do not get reviewed for years which can be extremely detremental..

At AIC Financial we offer regular reviews to ensure your current  pensions are suitable to your needs and are performing to your expectations. We annually check your attitude to risk to ensure this has not changed along with your capacity for loss and retirement purpose. We could also save you money! Please contact us for your free initial, no obligation Retirement review using the link below.