How Does Pension Drawdown Work?
Pension Drawdown plans, capped or flexible, also referred to as Income Drawdown, Income Withdrawal, Pension Withdrawal or Pension Release allow you to take benefits (tax-free cash and an income) from your pension funds without buying an annuity. From April 2010, the minimum age that you are able to take benefits is 55 (previously 50).
From 6 April 2011 existing income drawdown rules were replaced by new rules known as Capped Drawdown and Flexible Drawdown. This replaces both existing rules for Unsecured and Alternatively Secured Pensions (USP and ASP).
Taking benefits from your pension before the normal retirement age of 60 or 65, is sometimes referred to as “unlocking your tax free cash”. Some people want to unlock their tax free cash early to use the funds to clear debts or repay a mortgage and the present rules allow you to do this from age 55. You do not have to stop work in order to take your benefits. You must bear in mind though, that by taking the tax-free cash (and any income) early you are reducing the funds available for you when you retire.
From the time of taking benefits (known as crystallising your fund) you can use Pension Drawdown to take both tax-free cash and an income. The fund remaining after taking tax-free cash is still invested as a pension fund, continuing to benefit from a tax efficient environment in the same way that it did prior to taking any benefits. You can take benefits from both Protected and Non-Protected Rights.
Capped drawdown – new rules about pension tax relief
If you have already moved all or part of your pension pot into capped drawdown, read our guide to understand new rules from April 2015 that reduce how much tax relief you can get on future defined contribution pension savings if you exceed your income cap. If you exceed the cap the rules for flexi-access drawdown will apply going forward.
Read our guide on Capped Drawdown
The value of investments and income from them may go down. You may not get back the original amount invested.
A pension is a long term investment. The fund value may fluctuate and can go down. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation.
Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from taxation, are subject to change.