Below we look at how drawdown has become progressively more flexible and how investors can now take advantage as it enters its third decade. In the last year alone, the number of people choosing drawdown has more than doubled.
What is drawdown?
Drawdown was first introduced in the summer of 1995. Initially, it was the preserve of a minority of wealthy pension investors. Plans were expensive as it was a niche offering and advisers and pension companies were able to apply high charges for their services. A set up charge of 3% of the total fund was not unusual (which would mean £7,500 on a fund of £250,000). Self-Invested Personal Pensions (SIPPs) were in their infancy and low-cost SIPPs did not yet exist.
Over its lifetime, a new breed of drawdown has emerged with lower charges, greater flexibility and more tax breaks for passing pensions on when you die.
After taking tax-free cash, which is usually up to 25% of the pension, drawdown allows you to draw income directly from the fund, which remains invested and subject to the ups and downs of the stock market. The income can be varied to suit your requirements.
Thanks to the advent of low cost SIPPs, the cost of pension investing has come down significantly.
How is drawdown more flexible? What are the risks?
Investors can now start and manage their wn drawdown plan for themselves if they are happy to make their own investment decisions. Today managing a pension in drawdown can be as easy and convenient as other investments.
You don’t need to take any income at all if you wish, and can instead take only the tax free cash and leave the rest to grow. Income can be stopped, started, or varied as required.
However drawdown is not secure and despite the greater appeal it remains a higher risk option than a secure annuity, which will pay an income for life. It’s important to remember investment returns aren’t guaranteed. Keeping your pension invested means it could fall as well as rise in value. If you take too much out, you live longer than expected or your investments perform poorly you could run out of money.
The value of pension and the income they produce can fall as well as rise. You may get back less than you invested.
The value of your investment and the income from it can go down as well as up and you may not get back the original amount invested. Past performance is not a reliable indicator for future results. Levels, bases and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor. Please contact us for further information or if you are in any doubt as to the suitability of an investment.