Are there any risks with pension drawdown?

If you want the flexibility to take money out of your pension as and when you want to, drawdown could be for you. As your savings remain invested there is an element of risk, so it’s about finding the right balance.

What you need to know about pension drawdown and the possible risks

This guide explores the risks involved with pension drawdown, including what they are, how you could reduce them and if they are worth taking. Towards the end of the page we have also included answers to some of the most common questions people have.

Headline facts at a glance

Pension drawdown is the main alternative to buying an annuity. Instead of selling your pension fund to an annuity provider in exchange for a secure income for life, you retain ownership and it stays invested. This gives you the flexibility to withdraw money as and when you need it. The benefit of keeping your pension invested is your pot has the opportunity to grow. Equally, if your investments take a hit, so could the value of your pension. It’s about finding the right balance between risk and reward to give you what you need.

What is investment risk?

Investment risk is simply the amount of risk you are prepared to take with the investments in your pension. If you are comfortable with a lot of risk you may want a big chunk of your pension pot invested in the stock market. In the long term, this is where the highest growth usually occurs. Although, in the short term, investing in stock markets can a bumpy ride where a sudden slump might temporarily reduce the value of your pot. This could become an issue if retirement is on the horizon. If you don’t like taking too much risk, you may prefer to keep most of your money in cash and other steadier options. While they won’t lead to a huge increase in the value of your fund, they’re usually safer.

Working out how comfortable you are with risk can be tricky. It’s easy to be tempted by the opportunity of huge rewards and not think much about the possibility of big losses. By talking to a regulated financial adviser, you can find the level of risk you are truly willing to take.

There’s flexibility with pension drawdown

Pension drawdown is also much more flexible than other pension options, such as buying an annuity, because you can access your money as and when you want to. And because with pension drawdown you continue to own your pension, you can pass on any unspent savings to the people who matter most to you.

Could you run out of money?

If you spend your pension too quickly or your savings are hit by a slump in the stock market, there is the possibility of running out of money too soon. And if you take a large amount out of your fund, you could face a big tax bill. The good news is that a regulated financial adviser can tell you if drawdown is suitable for you and help to manage the risks, including how much money you can safely take each year, so you don’t need to worry.

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More information…

Choosing how to take an income from your pension is a big decision, and there are pros and cons for each option. This guide has explored the risks to consider with pension drawdown and why they could be worth taking. There are also answers below to more questions you might have. If there’s anything else you’d like to know, why not give us a quick call so we can discuss it with you in person?

If I choose drawdown can I change my mind later?

Yes, you certainly can. Pension drawdown is a flexible option, and that includes the ability to change your mind at any time.

I like the idea of flexibility but want security, can I buy an annuity as well?

Yes, you can mix and match if you want to. You can sell part of your pension fund to buy an annuity, and use drawdown to access the rest of your savings when you need to.

Are there risks with an annuity?

Annuities do have certain risks, although they are different to the ones you face with drawdown. The biggest risk is probably a change in your situation, because you aren’t able to get a refund on your annuity. There’s also a risk that if the annuity doesn’t increase your income each year, it may not keep up with the rising cost of living over time.

Call 0800 304 7288 for a friendly chat about your pension

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Frequently asked questions

A quick reminder that the tax you pay depends very much on the current rules and your personal circumstances, and so could change in the future.

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