Pension draw downs allow Brits to take money out of their pots without cashing in on the entire thing – and the number of people doing so has massively increased since the last financial year
A finance expert has broken down the huge 26% increase in Brits drawing down on their pensions once they hit retirement age – and what it means for your funds. Pension drawdowns allow Brits to take money out of their pots without cashing in on the entire thing.
Up to 25% can be withdrawn tax-free, while the rest of the pot stays invested and subject to income tax. New data from the Financial Conduct Authority (FCA) has found that the number of pension plans being accessed for the first time has increased by 8.6% on the previous financial year.
The sale of draw down policies saw the biggest increase, with nearly 350,000 being accessed and entered into in the last tax year – a rise of 26%.
Analysing the figures, finance expert Laura Pomfret told BBC Morning Live: “So pension draw down is a great flexible retirement option – it lets you take money from your pension pot when you need it but it keeps the remaining funds invested.
“And this increased massively after the pensions freedoms work that went on in 2015 when draw downs became more mainstream.
“Typically more people had had an annuity before then – you get more control over where it’s invested and how often you access it. And times are tough right now, I can imagine that’s why maybe people are accessing it more.”
Along with withdrawing the 25% lump sum, Brits can also draw down on their pensions in chunks.
A portion can be removed, 25% of which is tax free, and the remainder is taxed. It’s a good option for people who don’t need the lump sum.
However, anyone withdrawing should be cautious as they could be pushed into a higher tax band.
Describing the benefits of drawdowns, Laura went on: “You can choose how much money to withdraw and when. If you wanted to work part-time after retirement age or after the age you’re entitled to take it out, it means you can plan…another benefit is that the pension remains invested. So it’s really important that we can try and keep our pension growing.
“Especially trying to beat inflation – obviously it can go down as well as up but some people just like to know that it’s still growing and I take what I need.
“Also, you can make your withdrawals tax efficient… you can decide when to push go and take that income, because pension income outside of our tax free lump sums is taxable as normal income.”