How does pension drawdown work?

Once you decide to retire, you’ll need to figure out how to withdraw from your pension pot. While there is the option to purchase an annuity or make a lump sum withdrawal, taking your pension through a drawdown can be a viable alternative.

In this guide we’ve explained what a pension drawdown is and if it is better than an annuity.

Otherwise known as a flexible retirement income, a pension drawdown lets you withdraw from your pot as you wish.

There aren’t any limits or restrictions to the amount you can withdraw from your fund, which might suit some people. However, this flexibility does mean you’ll actively need to monitor your pension so it doesn’t run dry.

All withdrawals contribute towards your taxable income, which is explained in more detail below.

If you’re only withdrawing what you need from your pension each month, the rest of your pension can continue to grow.

While this may seem like one of the main benefits of a pension drawdown, it can also be a disadvantage. If your pension is left in a heavily exposed fund, it could reduce your holdings.

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Yes, you can still make contributions into your pension if you opted for a drawdown.

For some, this is where things can seem more complicated as the Money Purchase Annual Allowance (MPAA) comes into play. In essence, once you take your first tax-free withdrawal from your pension the MPAA kicks in and you’ll be allowed to deposit £10,000 at most into your pension.

Any deposits over this threshold will be liable for tax upon withdrawal.

If this is something which affects you, then it is worth speaking to an independent financial adviser to determine whether your pension is the best place for your cash.

The charges you’ll face depend on your pension provider.

However, we’ve listed some of the fees you could encounter, below:

• Drawdown fee – This is charged on each withdrawal made from your pension. It could be a set charge or a percentage of the amount withdrawn.
• Service charge – This usually comes in the form of an annual fee for holding your pension. Many providers charge a percentage of your pension holding.
• Exit charges – If you wish to move one of your pension pots to another provider then you may face an exit charge.