Guide to drawdown

If you are looking for flexibility when taking income from your pension then drawdown could be for you. However, a thorough understanding of the risks is required.

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  1. Rob Morgan

Pension investors have two main options at retirement: Continue investing and take out money from their pot as and when needed (also known as pension drawdown), or buy an annuity that guarantees a regular income for life. This is a complex issue facing retirees, and any decision to use drawdown must be carefully considered.

Drawdown offers extra flexibility and the potential for better returns or more income from a pension pot - given the relatively low returns on offer from annuities today. It can also offer better benefits to a spouse or dependants on death. However, drawdown is also a risky option. Keeping your pension fund invested means the value can fluctuate according to what markets are doing. You also need to be careful about how much you draw out and when to ensure you leave enough for future needs.

In contrast, an annuity provides a secure income. The income is guaranteed for as long as you live, which is why it is considered a less risky approach. However, there is no longer any access to the pension fund, and once set up it can’t usually be changed or cancelled. It’s less flexible than drawdown but you can still choose some features to suit your needs. This includes income going to your spouse or partner after you die and the option to increase income in line with inflation.

Our new guide is intended as a short summary of some of the issues surrounding drawdown and the terminology used. We suggest making a full assessment of the risks ahead of retirement, or obtaining regulated financial advice or appropriate guidance that encompasses this.

Read our Drawdown Guide → 

The value of investments, and the income derived from them, can fall as well as rise. Investors may get back less than invested. This article/guide does not constitute personal advice based on your circumstances. If you are unsure of the suitability of any investment please seek professional advice. The information in this article/guide is based on our understanding of UK Legislation, Taxation and HMRC guidance, all of which are subject to change. The tax treatment of pensions depends on individual circumstances and is subject to change in future.

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Investment involves risk. You may get back less than invested.