Freedom factor 3: Adjustable income

Adjustable income enables you to take income from your pension pot and leave the rest invested. Depending on what your pension provider offers, you may need to move your pension pot to a ‘flexi-access drawdown’ arrangement (also known as a ‘drawdown pension’), which is a financial product offered by most providers. And you can usually take as much or as little income as you like.

Before you unlock this option, there’s a lot to think about, and you may want to consider taking guidance or advice. We can help with this. Read on!

Five feel good factors about adjustable income (‘drawdown’)

✔️ Total flexibility

In principle there are no limits on the amount you can take out or when you can take it, meaning you can manage your income in a way that suits your needs. For example, you could take more income in a year when you have a large one-off expense. If you don’t usually need that much to maintain your standard of living, you could then take smaller amounts of income in other years.

✔️ Inheritance

Any money left in your drawdown pot when you die could go to your beneficiaries (though there’s no guarantee there will be any left).  If you die before you’re 75, your beneficiaries can usually have the money tax-free. If you’re over 75, they’ll pay tax at their own income tax rate, whether they take it all at once or as an income.

✔️ Manage tax

The income you take out is taxable in the same way as any other income. But you can be tax-efficient with your money by paying attention to the following things.

• • Your personal income tax allowance (the amount you can earn in a tax year before you start to pay income tax). The standard allowance is currently £12,570 a year.
  • The tax year you’re taking money in. The tax year is April to April. 

You can normally take up to a quarter of your pension pot as tax-free cash before putting the rest into your drawdown arrangement – but this will leave you less to use for future income.

✔️ Changeable in the future

You don’t have to stick with adjustable income for the rest of your life. At a later date, you could buy an annuity to give you a guaranteed income, for example.

✔️ Potential to keep growing

Although you’re taking money out, the rest will stay invested in your drawdown arrangement, so it could continue to grow through future investment returns. This isn’t guaranteed though. Investments can fall in value as well as rise – so whether your pot grows in the future depends on how your investments perform, as well as the amounts you draw out.

Three not-so-good factors about adjustable income (‘drawdown’)

❌ Total responsibility

Unless you get guidance or advice, you have to make all the decisions about how much to take out and when, and how to be tax-efficient with your money, yourself. You’ll also need to decide which drawdown product to choose. There can be big differences between pension providers’ offerings including charges, how flexible the products are and what investment options they offer. Could you tell which was the best value?

❌ Investment risk

You’ll have to choose your own investments and take the risk they could fall in value, which could leave you with less income than you’d thought.

❌ The risk of running out

Adjustable income is not guaranteed. You could run out of money altogether. It’s important to make a plan so your income is sustainable over your lifetime. We can help you with this.

Take care with tax allowances:

If you’re thinking of taking some of your retirement savings whilst still saving into a defined contribution pension, you could lose tax relief on future retirement savings.

When saving into a pension you benefit from tax relief, as long as the total amount is within the annual allowance. The annual allowance is currently £40,000 for most people. This allowance includes both your and your employers’ pension contributions into your pension pot, and any personal or stakeholder pensions you have outside of the workplace.

However – if you start taking your retirement benefits and still want to carry on saving for retirement, this allowance could fall to £4,000 (known as the money purchase annual allowance).

Helping you unlock your retirement freedom

If you’re thinking of taking your pension benefits soon, our retirement experts can help you unlock the options. Ask for a personalised options pack setting out your main options. You can then have a call with one of our friendly retirement experts to talk through how adjustable income might work for you. 

We can also offer paid-for advice (with competitive charges) to help you with:

• shopping around for a flexi-access drawdown provider (there can be big differences between providers’ offerings, including charges and how flexible their products are)
• choosing investments 
• making a spending plan to help you avoid the risk of running out of money in later life.  

Find out more about how our retirement experts can help you.