Pension drawdown rules

If you’re approaching your 55^th birthday*, retirement may be drawing near, but also that means you need to make some big decisions around how to draw your pension.

There are a number of options available to you, and depending on your provider’s policy and your financial goals for retirement, this may be the ideal window for you to shop around what different providers offer and take some financial advice.

We’ll cover the general rules here, with a particular spotlight on what Wealthify’s drawdown options entail. (*Note: the retirement age for workplace and personal pensions is increasing to 57 by 2028.)

Jump straight to:

• What is pension drawdown?
• Drawdown considerations
• Rules for pension drawdown
• How to move your pension into drawdown

What is pension drawdown?

The formal definition of pension income drawdown is choosing to take part of your workplace or personal pension as a regular source of income, while allowing the rest of it to remain invested (and hopefully, to keep growing).

However, there are different ways to arrange your retirement fund, and some people choose a ‘mix and match’ style of drawing their defined contribution pensions.

For example, you could:

• Take your whole pension in one go as a lump sum (there are different options to do this).
• Withdraw money when you need it.
• Receive a regular income based on your pot size.

There is some risk involved with pension investments though – as with any investing – the markets can go down as well as up. This volatility is something your pension will likely have weathered up until this point, as investing over the long term helps to mitigate market downturns and tries to beat the rate of inflation.

Just keep this in mind if you do decide to leave part of your retirement fund invested.

Drawdown considerations

There are things to weigh up before you dive in with drawing money from a pension. Some key considerations are:

• Keeping enough money aside if you live much longer than expected: The average life expectancy for men in the UK is now 87 years old and 90 years old for women. But according to the Office of National Statistics, there’s still a 10% chance you’d live until 101 years old.^[1] That means your workplace, personal, and State Pension (if eligible) need to be spread out to ensure you have money later on. There’s a balance with your decision-making here: withdrawing too much, too soon, could leave you without later in life. And if that’s the case, you may feel more comfortable getting an annuity instead.

• The remaining invested pension could start to underperform: One way to mitigate this is to set an annual calendar reminder to check in on your remaining pension projection. You can also use resources like the Retirement Living Standard’s guidance on how much people would need for their annual expenditure, and use things like Wealthify’s Pension Calculator to determine if you need to adjust things (you may find you don’t).

• And taking out too much early on in their retirement: This ties in both of the above points, as if you find yourself having withdrawn too much during your early retirement years, you may have regrets later on. Whether that’s because you then don’t have as much investing power left, the markets take a downturn, or your expenditure increases.

For all of these considerations, it might be worth speaking to a financial adviser with a background in pensions first to help you decide the best course of action.

Rules for pension drawdown

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.

With Wealthify, for example, we understand that our pension customers want a range of options for their retirement, so we offer four ways to withdraw from our Self-Invested Personal Pension:

1. The Pension Commencement Lump Sum (PCLS): When you reach retirement age, you can take 25% of your pension pot as a tax-free lump sum. The remaining 75% of the pot would then be subject to income tax when you withdraw.

2. Flexi-access drawdown: This is a combination of taking the 25% tax-free Pension Commencement Lump Sum and then leaving the remainder in the pension to stay invested, and be drawn on a regular basis, like an income (potentially meaning a smaller amount of your money is subject to income tax at withdrawal). This mix and match is how we define ‘flexi-access drawdown'.

3. Uncrystallised Fund Pension Lump Sum (UFPLS): Slightly different to the Pension Commencement Lump Sum (PCLS), the UFPLS option lets you take multiple lump sum withdrawals from a pension you haven’t started taking a regular income from (meaning it’s ‘uncrystallised’**). You can do this up until the pension pot runs out, but the lump sums will be taxed as the first 25% tax-free, and the remaining 75% taxed. So, if you withdrew £10,000: £2,500 would be tax-free, and £7,500 would be subject to tax. 

4. Small Pots: These are treated exactly the same as the UFPLS rules but only applies to pensions that have £10,000 or less in them (this defines them as a ‘small pot’).

However, we don’t offer a drip feed drawdown or annuity plan.

**Crystallised pensions

There’s a bit of confusing jargon around this one, but essentially, an ‘uncrystallised’ pension would be one you haven’t started withdrawing an income from yet. Then, when you do that, the pot becomes ‘crystallised’.

You may find you have more drawdown options before your pension crystallises (particularly if you’re thinking of transferring to a different provider before you start taking any money from your pot). So, you can think of a pension as being a bit harder to take chunks from it after it ‘crystallises’.

Flexi access drawdown

A popular choice for retirees, a flexi-access drawdown gives people the chance to enjoy an initial 25% lump sum and then take a regular income from the remainder of their pension pot.

A key benefit is that this allows the remaining funds to stay invested until a smaller amount is needed to cover the person’s regular outgoings/to use as income.

The person doesn’t have to take 25% as the tax-free lump sum either; they could opt for a smaller percentage if they feel that suits their circumstances better!

Whichever percentage you decide to go for, Wealthify offers flexi-access drawdowns to all of our pension customers.

Can I take all my pension as a lump sum?

With Wealthify’s Personal Pension, you could take the full amount under the:

• ‘Uncrystallised Fund Pension Lump Sum (UFPLS)’ rule;
• Or the ‘Small Pots’ rule.

However, only the first 25% of your withdrawals would be tax-free, the remaining 75% is taxable at the relevant income tax rate — and there is a lump sum allowance to consider (it would need to be below £268,275 for most people).

Withdrawing from your pension in full might not suit your longer-term financial goals for retirement, though, so speak with a pension specialist financial adviser first. MoneyHelper offers further guidance on taking lump sums in full here, as well as offering a free service called Pension Wise for people who are 50 years old or over, have inherited a pension, or who need to access their pension early due to serious ill health.

Taking smaller lump sums

If you’re planning to take smaller lump sums that are spread across different tax years, and leave the remainder of the pot invested, Wealthify’s pension can support this.

Some people choose to do this so that they can give their remaining pot the chance to hopefully grow further in its tax-efficient account — while potentially paying less tax as they withdraw their smaller lump sum.

This is because the income tax you’d pay on withdrawals is calculated over the tax year (April 6^th to the following April 5^th).

Not every provider can support you with this, though, so it’s worth checking before you get started with any drawdown option. Other considerations to take into account may be:

• Fees on lump sum withdrawals (Wealthify doesn’t charge for this);
• A cap on the number of withdrawals you make (you can make unlimited lump sum withdrawals with Wealthify).

The Money Purchase Annual Allowance (MPAA)

This is something that is triggered when you start taking income (any portion of your pension drawdown that’s taxable). It effectively means that the amount that can continue to be added to any of your pensions during a tax year is capped (workplace or personal pensions).

Your pension annual allowance would drop to £10,000 once the MPAA is triggered.

However, HMRC is usually on top of this and would contact you if your pensions have been contributed to above this amount. It’s just something to be mindful of if you’re continuing to work after accessing your pension at retirement age or are continuing to contribute large amounts to your pension pots, as you probably want to avoid any unnecessary tax charges from HMRC.

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.

Resources/References:

1. ONS | Life Expectancy Calculator