Lowes Magazine Issue 130

PLANNING

Unlocking our pensions: What is flexi-access drawdown?

Lowes adviser Helen Grieves looks at the most popular means to draw income in retirement – flexi-access drawdown – what it is and the benefits and risks associated with it.

Ten years ago, then Chancellor of the Exchequer George Osborne announced the ‘pensions freedoms’. These were dramatic changes to UK pensions legislation which, he said, meant people no longer had to buy an annuity with their pension and instead could keep control of their pension savings and any remaining money when they died could be passed on to their beneficiaries. In fact, at the time, people didn’t have to buy an annuity although most people did, but for a number of years the products had been offering poor rates compared to their long-term highs and most locked the money in and swallowed it up when the policyholder died. The alternative to annuities, drawdown products kept the pension savings invested and the individual would draw down the income they needed. How much could be taken in a year was capped at a figure set by the Government Actuary. The Chancellor also scrapped the limits on how much people could take from the other retirement products to give themselves an income. This had three effects: First, almost overnight the bottom fell out of the annuities market; flexi-access drawdown became the most popular and flexible option for individuals; and there arose a need for professional planning to ensure people didn’t draw too much out of their retirement income fund, potentially leaving themselves destitute in later old age. So, what is flexi-access drawdown? In a nutshell, flexi-access drawdown allows individuals aged 55 or over to withdraw money from their retirement pot while leaving the rest invested for potential growth. Unlike traditional annuities, which provide a fixed income for life, flexi-access drawdown offers more flexibility and control over pension savings. This better enables individuals to tailor their income streams to suit their lifestyle and financial needs. For example, many people are more active in early retirement and so incur greater expenses then than they do in later life.

At retirement, pension savings are transferred into a dedicated drawdown account, typically managed by a pension provider or other financial company. Once the funds are in the drawdown account, the individual has the freedom to decide how much income to withdraw, how frequently, and when. This enables adjustment of income withdrawals according to changing financial circumstances. While any funds remaining in the drawdown account can continue to be invested, providing the opportunity for the retirement pot to continue to grow over time through investment returns. It’s easy to see why the flexi-access drawdown approach has proved so popular over the past decade. Not all pension providers allow for a drawdown arrangement so individuals might find it necessary to transfer to a new provider in order to use their retirement pot flexibly, or simply to look around to see who is offering the best terms. These issues and the complexity of investing to maintain a steady income stream, protecting capital as much as possible, and calculating a sustainable level of income over the long term, is why most people prefer to have the help of a financial adviser with their drawdown account. While annuities have been out of favour since 2014, over the past year it has been possible to achieve higher annual rates of payment from annuities. This has made them more of an option again for anyone who has a smaller retirement pot and/ or who wants a guaranteed income from some or all of their retirement pot. As can be seen, flexi-access drawdown offers retirees flexibility and control over their retirement savings, allowing them to tailor their income streams to suit their lifestyle and financial needs. But it’s essential to carefully weigh the advantages and disadvantages of flexi-access drawdown as they will be influenced by personal circumstances. This is where professional financial advice from your Lowes adviser will be invaluable.

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