Pension Drawdown Calculator

Understanding Pension Drawdown

What is Pension Drawdown?

Pension drawdown allows you to access your pension pot while keeping it invested. You can take up to 25% as a tax-free lump sum and withdraw income as needed. The remaining funds stay invested, potentially growing over time.

Key Features

• • Access from age 55 (rising to 57 in 2028)
• • 25% tax-free lump sum available
• • Remaining withdrawals taxed as income
• • Keep funds invested while drawing income
• • Pass on remaining funds to beneficiaries

Flexibility vs Risk

Unlike annuities, drawdown gives you complete control over your retirement income. However, you bear the investment risk and longevity risk – your money could run out if you withdraw too much or live longer than expected.

Pension Drawdown Strategies

The strategy you choose for pension drawdown can dramatically affect how long your money lasts. Here are the main approaches and considerations:

1. Natural Yield Strategy

Draw only the income generated by your investments (dividends and interest), preserving capital for the long term.

• • Preserves capital for inheritance
• • Income varies with market conditions
• • Typically yields 2-4% annually
• • Lower risk of running out of money

2. Fixed Percentage Withdrawal

Withdraw a fixed percentage (e.g., 4%) of your pot each year. The pound amount varies with portfolio value.

• • Income fluctuates with portfolio value
• • Automatically adjusts to market conditions
• • Never fully depletes the pension
• • The "4% rule" is a common starting point

3. Fixed Pound Amount

Withdraw the same pound amount each year, adjusted for inflation. Provides predictable income but higher depletion risk.

• • Predictable income for budgeting
• • Higher risk of fund depletion
• • Doesn't respond to market downturns
• • May need to adjust if portfolio drops

Tax Considerations

Tax-Free Lump Sum

You can usually take 25% of your pension pot tax-free (up to £268,275). This is officially called the Pension Commencement Lump Sum (PCLS).

• • Take all at once or in stages
• • No tax on first 25% of each withdrawal
• • Consider timing for tax efficiency
• • Lifetime allowance abolished April 2024

Income Tax on Withdrawals

After your tax-free amount, all withdrawals are taxed as income at your marginal rate.

• • Added to other income for tax calculation
• • Could push you into higher tax bracket
• • Emergency tax may apply to first withdrawal
• • Consider spreading withdrawals across tax years

Investment Strategy in Drawdown

Asset Allocation

Your investment mix should balance growth potential with income stability and capital preservation.

• • Cash (5-10%): For near-term withdrawals
• • Bonds (30-40%): For stability and income
• • Equities (40-60%): For growth and inflation protection
• • Alternatives (0-15%): For diversification

Sequencing Risk

Market downturns early in retirement can severely impact your pension's longevity. This is called sequencing risk.

• • Keep 1-2 years of income in cash
• • Consider reducing withdrawals in down markets
• • Maintain diversified portfolio
• • Review strategy after market corrections

Sustainable Withdrawal Rates

The 4% Rule

The traditional 4% rule suggests withdrawing 4% of your initial pot value annually, adjusted for inflation. However, this was based on US markets and may not suit UK retirees.

UK Sustainable Rates

Research suggests these sustainable withdrawal rates for UK retirees:

• • 3% withdrawal rate: Very high probability of lasting 30+ years
• • 3.5% withdrawal rate: Good balance of income and longevity
• • 4% withdrawal rate: Moderate risk, review regularly
• • 5% withdrawal rate: Higher risk, requires flexibility

Dynamic Withdrawal Strategies

Consider adjusting withdrawals based on portfolio performance:

• • Reduce withdrawals after market drops
• • Increase slightly after good years
• • Set minimum and maximum withdrawal limits
• • Review annually and adjust as needed

State Pension Integration

Bridging to State Pension

If retiring before state pension age, you may need higher withdrawals initially, then reduce when state pension begins.

• • Current state pension age: 66 (rising to 67 by 2028)
• • Full new state pension: £203.85 per week (2024/25)
• • Consider delaying for higher payments (1% per 9 weeks)
• • Factor into withdrawal planning

Other Income Sources

Consider all retirement income when planning drawdown:

• • State pension payments
• • Defined benefit pensions
• • ISA withdrawals (tax-free)
• • Property rental income
• • Part-time work earnings

Drawdown vs Annuity

When Drawdown Works Best

• • You want flexibility in income amounts
• • You're comfortable managing investments
• • You have other guaranteed income
• • You want to leave an inheritance
• • You're in good health with family longevity

When to Consider Annuities

• • You want guaranteed income for life
• • You're risk-averse about investments
• • You have health issues (enhanced annuity)
• • You lack other guaranteed income
• • You're concerned about cognitive decline

Hybrid Approach

Many retirees benefit from combining strategies - using an annuity for essential expenses and drawdown for discretionary spending and legacy planning.

Inheritance and Estate Planning

Death Benefits

Pension drawdown offers significant inheritance advantages:

• • Before age 75: Usually tax-free to beneficiaries
• • After age 75: Taxed at beneficiary's income tax rate
• • No inheritance tax: Usually outside your estate
• • Nomination forms: Keep beneficiary details updated

Passing on Pensions

• • Beneficiaries can continue drawdown
• • Or take lump sum (may be taxed)
• • Or buy an annuity
• • Consider trust arrangements for protection