Drawdown allows you to take some or all of your 25% tax-free cash (assuming you have sufficient lump sum allowance remaining) first and the rest as an income or lump sums when you need them - although it will be taxable.
You can choose how much and when to take your taxable money. This gives you a little bit of control over how much tax you pay. For example, if you're a basic rate tax payer you could withdraw amounts that keep you within the basic rate threshold.
Any money that hasn't been withdrawn remains invested, meaning it can grow. Although please remember investments can go down as well as up and you may not get back what you put in.
It also allows you to pass on any money you have left in your pension to your loved ones when you die.
Benefits
- You have the flexibility to take your money out as and when you need it.
- You can manage your money in a tax efficient way, over a number of years.
- Any money left in your pension can be passed to your loved ones when you die. However there may be tax considerations involved here, so we’d recommend obtaining financial advice to ensure your needs are met.
- You’ll have the option to choose your investment funds, so your money could carry on growing.
Considerations
- You could run out of money before you die. How much you withdraw, fund performance, inflation and charges will all have an impact on how long your money will last.
- Any money you haven't withdrawn remains invested. It's important to make sure you're invested in the right funds for you. Also, investments can fall as well as rise and you may not get back what you put in.
- Any money withdrawn after taking your tax-free cash is treated as a taxable income. This means it could increase the amount of tax you pay. For example, you may be a basic rate tax payer but your withdrawals from your pension move you into the higher rate threshold. Tax rules can change and the impact of taxation and any tax relief depends on your circumstances, including where you live.
Some examples of using this option
Steve is 60 and has decided he wants to work part-time. He wants to access some of his pension savings to pay off some debt and pay for some urgent house repairs. His current pension pot is £100,000 and he has worked out that by taking his 25% tax-free cash he can take £25,000.
Steve takes his full 25% tax-free cash as a lump sum; £25,000
He leaves the remaining £75,000 invested
Steve gets the £25,000 he needs and can take the rest of his pension whenever he needs its.
The rest will be taxable, but as it's invested it has the chance to grow, of course it could fall too and he could end up with less than he started with.
This isn’t a real life example or a recommendation.
Gillian is 60 and is retiring with a pension pot of £50,000. She wants to start taking regular income from her pension savings and wants to take her full 25% tax-free cash up front to pay for some new windows for her house.
Gillian takes 25% tax-free cash at the start; £12,500
This leaves £37,500 as a taxable amount . She decides to take £2,000 each year.
Gillian can change this amount if she wants either up or down or stop taking an income altogether. It remains invested, so it can grow (but also fall). She'll need to keep an eye on her income and review her fund choices to make sure her pension lasts as long as she needs.
This isn’t a real life example or a recommendation.
Calculators and tools to help you plan
How much you could get from your pension
Our calculator will help you understand how the options could impact your retirement income. You can use it to understand what your pension pots can provide. It will also show you the buying power of your money by taking into account the effects of inflation.
Please read all of our assumptions to understand how we’ve worked out the amounts.
The results are not a recommendation and not financial advice.
How long your money could last
This planner shows you how taking different amounts of money from your pot can impact how long your money might last. You can input different amounts and see the impact it has.
How tax could affect your income
This calculator will provide an estimate of how much Income Tax you may pay, depending on how much money you take from your pension. You can input different amounts in the box that asks for your gross salary and see roughly how much tax you might have to pay.
How much Emergency Tax you might pay
This tool is to show you how much Emergency Tax you might have to pay on withdrawals from your pension pot.
Important Q&As
Yes, and it’s a good idea to keep on top of your investments as your needs might change over time and you might, for example, be willing to take less risk with your money as you get older. An adviser can help with these decisions. Remember, the value of your investment can go down as well as up, so you might get back less than you put in.
No. You can take as much of your tax-free cash as you need and take the rest later.
No, you have the control and flexibility over when you access your money and how much you wish to withdraw.
No, if you don't take the full 25% tax-free cash, any money left in your pension pot, could grow including any remaining/ unused tax-free cash. Though as with any investment your money could go down as well as up.
Other access options
Take a combination of tax-free and taxable
(also known as "take some or all pension as cash")
Need more help?
We know there’s a lot to consider when planning for retirement, and it can be tricky to know where to start. To help you understand all your retirement options, we recommend speaking to your adviser or getting guidance.
Find a financial adviser
Find an independent financial adviser in your area to help you in your future pension planning.
Visit
www.unbiased.co.uk
and enter your postcode.
Pension Wise
Pension Wise is a free and impartial guidance service offered by the Government. They can’t make recommendations or tell you how to invest your money, but will provide information on a range of available pension options.
Visit moneyhelper.org.uk/pensionwise or call 0800 280 8880 to book a phone or face-to-face appointment.
HMRC
Visit
hmrc.gov.uk to find out more information on tax rules and legislation which may affect you and your pension plans.
© Prudential 2024
"Prudential" is a trading name of Prudential Distribution Limited. Prudential Distribution Limited is registered in Scotland. Registered Office at 5 Central Way, Kildean Business Park, Stirling, FK8 1FT. Registered number SC212640. Authorised and regulated by the Financial Conduct Authority. Prudential Distribution Limited is part of the same corporate group as the Prudential Assurance Company Limited. The Prudential Assurance Company Limited and Prudential Distribution Limited are direct/indirect subsidiaries of M&G plc which is a holding company registered in England and Wales with registered number 11444019 and registered office at 10 Fenchurch Avenue, London EC3M 5AG, some of whose subsidiaries are authorised and regulated, as applicable, by the Prudential Regulation Authority and the Financial Conduct Authority. These companies are not affiliated in any manner with Prudential Financial, Inc, a company whose principal place of business is in the United States of America or Prudential plc, an international group incorporated in the United Kingdom.