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Drawdown, Tax And Flexible Retired Income. What Does It All Mean?

Once we reach 55, a whole spread of opportunities will open themselves up to us. One such bonus is the fact that we can finally access that hard-saved pension fund. Up to 25% of our savings can be taken tax-free, with the remaining 75% being subject to income tax. The payable amount depends on our total income for the year and our tax rate.  

We will only have to pay tax if we decide to draw over the 25% threshold. In this case, any income we take will be added to the rest of our taxable income for that year and will be taxed at 20% after we pass the personal threshold. Therefore, if we were to take out a large withdrawal pushing us into the £40,000 to £150,000 bracket, we could be taxed at 40%. 

The pension provider is required to deduct any tax before a withdrawal is paid and it is likely that when we take a taxable payment for the first time, we will be taxed using an emergency tax code (it may be worth speaking to the pension provider about this). 

How do we manage our pot? 

If we choose to stay within the 25% lump sum, more often than not we will move the rest into funds that allow us to take a taxable income at times that suit us best. It is wise to choose funds that match our income objectives and attitude to risk. 

In addition to drawdown, annuities are still available and still very much appropriate given the right set of circumstances. It is paramount that we carefully plan how much income we can afford to take as we do not want to run out of money. Factors such as living longer than expected, taking too much out too early and poor investment performance can potentially hinder our plans. 

It is important to regularly review investments to try our best to ensure we are getting the most out of our pension pot and to avoid any unnecessary expenses or losses. 

26 June 2019

The views expressed in this blog do not in any way constitute advice and are specific to the date noted. As time passes the facts can change and readers should consult their adviser for up to date advice on any matters covered within the blog. Invest Southwest offers an initial review, which is free of charge, however long it takes. From this we will be able to confirm how we can help and give you an opportunity to decide if you would like us to. Thereafter, we will provide you with detailed recommendations and exact costs. Please note that we promise not to levy any kind of fee unless we can demonstrate a benefit to you.

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