To drawdown or not to drawdown?
The latest pension reforms have introduced greater freedom, flexibility and choice for people that want to tap into their pension savings when they reach 55.
In particular, there is greater flexibility for people to “draw down” part or all of their pension, rather than take the traditional route of purchasing an annuity.
Drawdown allows you to take a taxable income from your pension fund while keeping it invested in a favourable taxable environment. Apart from the first 25% of a pension which can be taken as a tax free lump sum from the age of 55, the remaining income from a pension (whether drawdown or annuity) is subject to tax in a similar way to a salary.
The greater freedom given to staff by the reforms all seem like a welcome idea but what are the advantages and disadvantages of drawdown?
And what do these changes mean for employers and how should they respond?
To answer the first question, the main advantages and disadvantages of drawing down pension savings are as follows:
- Employees can retain control of their pension funds
- They have the opportunity to earn additional investment returns on their funds
- They can take an income, or choose not to, as required
- They can make one-off withdrawals as and when it suits them
- When the member dies, the rest of the pension fund can be passed to their dependants
- No guarantees of future income (unlike an annuity)
- Members’ incomes may not be sustainable over the longer term of a retirement
- Their funds remain invested, meaning their value may go down as well as up, affecting how much they can withdraw
- Greater flexibility for members also means they have to manage their money during retirement
Although many people are aware of the new pension flexibilities, our Factor 55 research shows they need more guidance on how these reforms will affect them. Employees are increasingly expecting transparency, insightful advice and scheme flexibility from their employers. This provides an opportunity for employers to take the lead in providing staff with suitable information, guidance and support.
Equipped with the right tools, companies will be able to support this concerned workforce, allaying fears and helping people plan for the future they want. Companies that lead the way on supporting their staff on pensions will reap significant benefits in terms of staff retention, recruitment and reputation.
LifeSight offers full drawdown options for members, supported by online tools that make it easy for members to plan their spending and make good decisions. LifeSight Drawdown is also available as a stand-alone service for employers who want to offer their members access to the new flexibilities, but without having to set this up in their own schemes.
For more information please contact us.