Lowes Magazine Issue 130

PLANNING

Disadvantages of flexi-access drawdown • Investment risk: As the drawdown funds remain invested in the markets, they are exposed to investment risk. Just as the overall funds can benefit from staying invested as markets go up, they are also affected if markets fall. A sound investment strategy is needed to help mitigate against this. • Income is not guaranteed: Unlike annuities, which provide a guaranteed income for life, flexi-access drawdown income can be affected by market fluctuations and investment returns. If the pot falls in value, the income strategy may need to be reviewed. • Management charges: Providers typically charge fees for managing flexi-access drawdown accounts, including investment management fees and administration costs. These fees can reduce the overall value of the retirement pot over time. Weighing fees against value of the service received is important. • Complexity: Managing a drawdown account requires a certain level of financial knowledge and understanding of investment principles. Having financial advice from a professional is the best way to manage a drawdown approach.

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Pros and cons of flexi-access drawdown Advantages of flexi-access drawdown • Flexibility: This is perhaps the most significant advantage. The individual has control over how much income to withdraw, when to withdraw it, and how to invest the remaining funds, giving them the freedom to adapt their retirement finances to any changes in their circumstances. • Tax efficiency: As with other pension arrangements investment returns on the portfolio are exempt of tax and up to 25% of the pension pot can be tax-free, with the remaining withdrawals subject to income tax at the individual’s marginal rate. Management of withdrawals will help ensure an individual does not pay more tax than they need to. • Potential for growth: By keeping your retirement funds invested in the markets, there is the opportunity to continue growing the remaining pot over time. This potential for growth can help offset the impact of inflation, which is an important factor affecting retirement income. • Passing on wealth: Any remaining funds in drawdown can be passed on to beneficiaries. This would be free of tax where the donor dies before age 75 – see ‘Death benefits’ box. • Accessibility: Unlike traditional annuities, which provide a fixed income for life, flexi-access drawdown gives access to the savings when needed. This can be useful if an individual is faced with unexpected expenses. However, the benefit of taking money out of the pot has to be carefully weighed against the impact on its long term ability to provide the retirement income needed.

Death benefits Another key point for individuals to consider is the death benefits offered with a flexi-access drawdown arrangement. Any money left in the drawdown pot can usually be left to an individual’s beneficiaries. It works like this: • The pension is not subject to Inheritance Tax. • If the individual dies before the age of 75, any money left in their drawdown fund passes tax-free to their nominated beneficiaries, whether they take it as a lump sum or as income. The money must be paid within two years of the provider becoming aware of the benefactor‘s death. If the two-year limit is missed, payments will be added to the income of the beneficiary and taxed as earnings. • If the individual dies after the age of 75 and their nominated beneficiary takes the money as income or a lump sum, the money will be added to their other income and taxed as earnings. A beneficiary might be able to choose to continue drawing down from the pension pot, taking a one-off lump sum or buying an annuity. It will depend on the terms of the drawdown arrangement.

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