Moving your pension into drawdown can be stressful, especially when there are so many rules about how and when you can take your money out.
Here’s a quick guide to help you understand how pension drawdown works.
What is pension drawdown?
Pension drawdown is a way of taking money out of your pension, so you can continue to receive an income while enjoying your retirement. But with so many pension schemes out there, the rules for pension drawdown can differ, and it’s important to be familiar with them that way you’ll be able to make the most of your pension.
What are the different pension drawdown rules?
The way you take your funds out will depend on the nature of your pension. There are a few different types of pension, including workplace pensions and personal pension.
If you have a defined benefit pension, you will receive a specific income for life which will increase every year. If your money sits in a defined contribution scheme, you’ll be able to choose how you want to move your pension into drawdown. And there are three main ways to do this. You can:
- Take your whole pension in one go as a lump sum,
- Withdraw money when you need it, or
- Receive a regular income based on your pot size.
Before you withdraw anything, make sure you check the rules of your pension scheme – not only will you know how you can take your money out, you’ll also be informed about when you’re allowed to move your pension into drawdown.
Most pensions will let you dip into your pot when you turn 55, but it’s still a good idea to check with your pension provider. If you’ve been contributing to many different workplace pensions, you may not remember where all your pots are!
Don’t worry, it happens to a lot of people, and there are ways to find your lost pensions – you can go on the HMRC website and answer some questions, and hopefully, you’ll be able to lay your hands on any lost pensions1.
Also, to make things easier and avoid any confusion, it could be worth bringing all your workplace pensions into one simple scheme, that way you’ll only have one set of rules.
If you have a personal pension, or Self-Invested Personal Pension (SIPP), you should be able to access your money on your 55th birthday (which is rising to the age of 57 from 2028). But you’ll still have the possibility to pay into your pot until you turn 75.
Although it’s tempting to enjoy your pension money at a young age, it could pay to wait a bit. Plus, the longer you hold onto your pension pot, the better chance it has to grow and deliver higher returns, thanks to a simple thing called ‘compounding.’
When you invest, you typically earn dividends (profits) on your investments, and if you reinvest them, you’ll be giving your money more potential to grow, and your profits could potentially generate further profits – that’s compounding for you.
And the longer you keep your money invested, the more efficient the power of compounding will be. So, if you want to make the most of your retirement, it could be a good idea to keep up with the savings habits until you really need the money.
How much tax will you pay in pension drawdown?
When it comes to pension drawdown, it’s important to know how much tax you’ll be paying. Let’s start with the good news! The first 25% you’ll take from your pension is tax-free. You can take this 25% out either in one go or gradually – it’s up to you.
Then, once you’ve used your allowance, you’ll typically need to pay tax as you make withdrawals. Everything you take out will be added to the rest of your taxable income, meaning large withdrawals could put you in the higher tax bracket.
So, before you take anything out, make sure you check the current income tax rates and personal allowance on the HMRC website – this should help you plan your withdrawals2.
How to move your pension into drawdown
Moving your pension into drawdown is easier than you may think. All you need to do is contact your provider and let them know you want to take money out of your pension. You may need to complete some forms, and then the drawdown should start.
At Wealthify, we accept monthly drawdowns. Simply contact our Customer Care Team on 0800 802 1800 or via Live Chat, and we’ll arrange your monthly payments, so you can relax and fully enjoy your later life.
For more information on the rules and your rights surrounding personal pensions, please see: the government's personal pensions page
Whether you’re at the beginning, middle, or end of your pension journey, our pension calculator can help you understand what your finances could be like in retirement.
Wealthify does not provide financial advice. Please seek financial advice if you are unsure about investing.
Please remember the value of your investments can go down as well as up, and you could get back less than invested. Past performance is not a reliable indicator of future results.
Your tax treatment will depend on your individual circumstances, and it may be subject to change in the future.
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