What is a drawdown pension?
A drawdown pension is a way of taking money out as income in retirement, without withdrawing your entire pension pot. Instead, your money remains invested, usually in the stock market, which can be risky, as the market can be volatile and fluctuate.
At 55 years old, you can begin to consider the best funds for income drawdown in retirement, as well as take the first 25% of your pension tax free. Any subsequent lump sum withdrawal is subject to income tax, according to standard rates.
Best drawdown pensions
Whether you’ve already withdrawn your lump sum or considering the best drawdown pensions for the near future, it’s important to browse the market and shop around. This way, you can get those most out of your pension, and maximise your return by capitalising on the best funds for income drawdown.
However, before you consider changing your plan, or entering a new drawdown pension, you should consider the two types: capped and flexi access.
Capped drawdown pension
If you began exploring pension drawdown options prior to April 2015, you may have come across capped pension drawdown products. These allow you to withdraw your initial 25% lump sum, tax free, before limiting, or capping, the income you can continue to take. This limit is worked out using Government Actuary Department (GAD) rates.
However, while you’re able to continue benefiting from this scheme if you’ve been retired for some time, this pension drawdown has been unavailable for new retirees since 2015.
Flexi-access drawdown pension
The difference between a flexi-access drawdown pension and a capped pension drawdown, is that, with a flexi arrangement, you are able to withdraw lump sums from your pension pot beyond your initial 25% tax-free total.
Because a drawdown pension is ‘flexi-access’, it is up to you, as the retiree, to decide how you manage your money with more freedom than a capped drawdown pension plan offers, whether you continue to take regular income or sporadic lump sums. Your pension pot will remain invested until you act, making these the best funds for income drawdown if fluidity of income is your aim.
Top pension drawdown tips for expats
1. Diversify your drawdown
Pension drawdown products can be a flexible way to use your savings the way you want to. Consider your pension drawdown options, because by investing, you can unlock growth. But you must be aware that returns are never guaranteed.
In most cases, as previously highlighted, you can take up to 25% of your pension as tax-free cash while leaving the rest invested.
If you choose to do this, it is absolutely essential that any portion of your savings pot you allocate to pension drawdown is sufficiently diversified. If you are overly invested in any single country, region, asset class or sector, you risk losing all or a significant part of the fund in the event of any seismic or even isolated political, economic or market event which affects the markets.
However, this doesn’t mean that you should keep your fund entirely in cash savings. Doing so is little better than keeping money under a mattress and can result in significant loss of opportunity. The Financial Conduct Authority (FCA) has said that it will look into the possibility of preventing SIPP holders from investing solely in cash. Instead, the FCA suggests an asset allocation of 50% equities, 20% government bonds, 20% corporate bonds, 7% property and just 3% cash.*
Having said this, the needs of expat retirement savers are individual, so you should always speak with an accredited and regulated expat pension adviser before making any decisions regarding pension drawdown and transfers. This brings us neatly to our next point.
2. Seek Regulated Pensions Advice
According to data from the Financial Conduct Authority, between April 1 2018 to March 31 2019 (2018/19), 34% of individuals who took pension drawdown products did so without taking regulated advice. This is slightly worse than the 31% seen in 2017/18** and still well short of where the situation should be.
However, retirement savers with larger pension pots are more likely to take advice; 7 in 10 consumers with funds worth £100,000 or more sought regulated advice. This compared favourably with the 2 in 10 advice-uptake rate seen in consumers with pots worth £10,000 or less.**
The truth is that unless you are a seasoned wealth manager, pension planner or expat financial adviser, you are unlikely to posses the necessary expertise to take pension drawdown without the benefit of professional advice. So, our tip is: Don’t! The stakes are simply too high.
3. Preserve your future cashflow
One of the most common and serious mistakes people make when accessing a fund via pension drawdown is to quickly erode its value without consideration for their future needs.
Figures from the FCA reveal that in the 2018/19 period, 4 out of 10 individuals taking drawdown pension took more than 8% of their fund each year***. Contrast this with guidance from the Institute and Faculty of Actuaries which advises a sustainable annual pension drawdown rate to be 3.5%**** and it is easy to see how some retirement savers can inadvertently and significantly reduce their future spending power in just a few years.
This is not to say that account holders cannot take more than 3.5% a year; it is simply the case that advice should be taken to ensure they have a pension drawdown plan in place which aligns with their future retirement goals and cashflow needs. See, point 2; Seek Regulated Pensions Advice.
Pension advice for expats
Blacktower Financial Management (International) Limited can help you make sense of your pension planning options and help you determine whether a SIPP transfer might be in your best interest, as well as go through the pension drawdown options.
We can help you negotiate the tricky SIPP rules, avoid unregulated investments, ensure a diverse and beneficial asset allocation and make the most of your unique cross-border tax restrictions and opportunities. Contact your local Blacktower Financial Management office today for more information.
Disclaimer: The provision of information in this communication is not based on your individual circumstances and does not constitute investment advice. Blacktower makes no recommendation as to the suitability of any of the products or transactions mentioned.
* https://www.fca.org.uk/publication/consultation/cp19-05.pdf Page76. Accessed 08-11-19
** https://www.ftadviser.com/pensions/2019/09/25/half-of-pension-pots-accessed-without-advice/ Accessed 08-11-19
*** https://www.fca.org.uk/data/retirement-income-market-data Accessed 08-11-19
**** https://www.actuaries.org.uk/news-and-insights/public-affairs-and-policy/ageing-population/defined-contribution-pensions Accessed 08-11-19
Disclaimer: This communication is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice form a professional adviser before embarking on any financial planning activity.