The PensionBee Drawdown Guide

Transcription

1 The PensionBee Drawdown Guide Your balance 41,216 Top up 39, Tue, 21 Oct Capital is at risk 1

2 Contents 1 What is drawdown? A brief overview of what income drawdown actually is 2 How drawdown works Everything you need to know about income drawdown, from how to take your pension to tax rules 3 The benefits and drawbacks of drawdown What to consider when deciding whether drawdown is the right option for your retirement 4 Drawdown with PensionBee Three simple reasons to draw down with us 1

3 Introduction In the past, if you retired with a defined contribution pension you usually had to use it to buy a pension annuity, a product that guarantees you an income for the rest of your life. Under reforms introduced by former Chancellor George Osborne, you now have much more flexibility, and it s against this backdrop that growing numbers of savers are choosing to withdraw from their pension directly. This process is known as drawdown, and this guide will give you a basic overview of the process. 2

4 What is drawdown? 1 Drawdown is one of the options for taking your pension when you reach retirement. It means leaving your pension money invested and taking cash as and when you need it. Since April 2015, all new drawdown products are now flexi-access drawdown, which means you can choose how much money to take from your pension each year of retirement. In contrast, the alternative option of an annuity pays you a guaranteed income, for a fixed period or for the rest of your life. Ultimately, the aim of drawdown is to give you more freedom to manage your savings. However, with this freedom comes extra responsibility as we ll touch on in the next section. 3

5 If you have a PensionBee pension, you can choose drawdown from the age of 55, straight from your BeeHive How drawdown works 2 Drawdown becomes an option as soon as you reach the age of 55. So, as long as your pension is with a drawdown provider - such as PensionBee - then you ll be able to start making withdrawals from your 55th birthday. That said, there s some important things to bear in mind, especially when it comes to tax. The drawdown tax facts Under current drawdown legislation up to 25% of your pension can be taken tax-free, in one lump sum or multiple portions. The remaining 75% is subject to income tax. The amount you pay depends on your total income for the year and your tax rate. 4

6 This means that if you re taking up to 25% of your pension as the tax-free option, it s really quite simple. You will pay no tax on any of that 25% regardless of whether you are: Taking cash in chunks; or Taking your entire 25% in one go The only time you will end up paying tax How do I pay this tax? Your pension provider is required to deduct any tax before a withdrawal is paid under Pay As You Earn, and when you take a taxable payment for the first time it s likely that you ll be taxed using either an emergency tax code or the tax code provided on your valid P45. See the table below for how this emergency tax could impact on your withdrawal. If you are a PensionBee customer then you will be placed on an emergency tax code, and you should settle any remaining underpaid or overpaid tax directly with HMRC. is if you opt to take an amount over this 25% threshold. In this case any income you take will be added to the rest of your taxable income for that year, meaning taking large withdrawals could push you into a higher tax bracket. With this in mind, if you are taking more than 25% of your pension it s worthwhile checking the current income tax rates and personal allowances. You may pay less tax if you spread out your cash withdrawals and keep below higher rate bands. Single withdrawal of Tax deducted Payment to you 1, ,000 1,058 3,942 10,000 3,058 6,942 Emergency tax assumes you will be receiving the same payment for every month of the tax year and that you are entitled to 1/12 of your basic Personal Allowance each month. In 2017/18 the Personal Allowance is 11,500 and you are allocated a tax-free allowance of 11,500/12 = for your payment. It also splits the relevant tax brackets into monthly figures rather than annually. Using our above example of 1,000 taxable income, the calculation would work as follows: gross income Personal Allowance = taxable income monthly income falls within the Basic Rate Tax band and therefore is taxed at 20% * 20% = 8.33 tax - 1, gross income tax = net income which is rounded to 992 in our table It is important to note that whilst this is the tax deducted under Emergency Tax it is unlikely that it will reflect your personal tax position and you will be able to reclaim any overpayment of tax directly from HMRC. 5

7 Other important things to consider Tax isn t the only thing to bear in my mind, and before you start making any withdrawals you should also remember: Responsibility for your income rests with you If you opt to drawdown then you re totally responsible for choosing your level of income. Excessive income withdrawals could reduce your income significantly, plus if you live longer than you expect you could run out of money. Your contributions could be impacted Pension contributions are normally subject to a 40,000 annual allowance, but this can change as soon as you start withdrawing from your pension. Once you take cash above your 25% tax-free allowance, you ll then become subject to the Money Purchase Annual Allowance of 4,000. This is particularly significant if you do decide to drawdown at 55, as you could conceivably still have a decade or more of contributions still to make. Drawdown is a flexible option when taking your pension Drawdown doesn t have to be the only option Finally, it s important to remember that drawdown needn t be your only option. For instance, part of your pension could be used to buy an annuity (so as to generate a secure income) while you could leave the rest in drawdown for some flexible income, accessible as and when you need it. 6

8 The benefits and drawbacks of drawdown 3 Now we ve provided an overview of the drawdown process it makes sense to look at the benefits and drawbacks. It s by no means a onesize-fits-all product and what works for some might not work for others, so it s essential you weigh up the pros and cons before making any drawdown decisions. Let s kick things off by first looking at the benefits. 7

9 It keeps your savings invested Drawdown keeps your money invested - typically in a mixture of shares, bonds, and cash. This means that there s potential for your savings to grow, unlike the annuity option which usually guarantees that your pension income remains fixed. It can prove tax-efficient If you re smart with managing your drawdown income you can ensure it remains in the lowest tax band. With this in mind it can be wise to speak to an accountant if you foresee taking a drawdown income, as they can assist you in doing it taxefficiently. It gives you greater flexibility The introduction of flexi-access drawdown has provided much greater freedom, meaning that you can take from your savings as and when you wish. In contrast to an annuity, you can create a variable income that caters to your individual needs. It s an excellent way to pass on your wealth Any beneficiary will either pay no tax if you die before age 75, or their normal income tax rate if you die after the age of 75. You re also able to nominate anyone to inherit your remaining pension fund - not just your spouse or a dependent child. 8

10 Despite these considerable benefits, it s still important to consider the cons. Here s some drawdown drawbacks to bear in mind. Your investments can go down, as well as up One of the drawbacks of leaving your pension invested is that it s more vulnerable to the fluctuations of the markets. If your main priority is to receive a fixed income for life, then an annuity is likely to be a better option. You can have too much control It takes careful planning to ensure that your pension pot never runs out, and for some this sort of control can be daunting. If this is the case then it can be wiser to consider an annuity. 9

11 Drawdown with PensionBee 4 If you ve decided that income drawdown is the best approach, then why not start enjoying your retirement with PensionBee? We offer drawdown to our customers once you turn 55. Here s three benefits of drawing down with us. 10

12 Access your savings all in one place PensionBee offers a simple, stress-free way to take cash from your pension. We combine all your old pensions into one online plan, which makes withdrawals much simpler. With us, you don t have to contact multiple providers any time you want to access one of your pots. All your pension money is put in one place, plus you get personal customer support from your dedicated BeeKeeper. Make withdrawals in a few simple steps Our drawdown option gets activated as soon as you hit your 55th birthday, and from then on it s just a case of visiting your BeeHive and answering some simple questions. Paying out your money typically takes around two weeks, and we ll keep you updated every step of the way. Put more money in your pocket Unlike other providers we won t charge you excessive fees. There will be no cost unless you transfer to us and take your whole pot within 12 months, in which case there s a charge of

13 A bit about PensionBee PensionBee is an online pension manager that combines your old pensions into a good value, online plan. We think that the current pension market is broken, and we re on a mission to fix it. We believe that you should be in control of your financial future, and that pensions today should be easy and fair without hidden costs or jargon. We re on a mission to give you full control of your money and to help you get the most out of your pension. 12

14 GET STARTED NOW PensionBee Ltd, 50 Southwark Street, London SE1 1UN PensionBee is authorised and regulated by the Financial Conduct Authority. With pensions, your capital is at risk. 13