How to set up drawdown
Pension drawdown enables you to take an income from your pension pot while it remains invested.
You can find out more about how drawdown works by reading our guide: what is drawdown?
This page covers the practical steps you need to take to start drawing an income from your pension pot.
Review your current arrangement
The first step that you need to take before you start drawing an income is to review your current pension arrangement:
- Does your current pension wrapper allow drawdown? Some workplace pension schemes for example won’t allow you to take drawdown, so you’ll need to move your investments to a new pension product, such as a SIPP.
- Does your current pension offer the range and style of investments that will suit you?
- Are you happy that your current pension investments match up with your goals for the next five to ten years?
When you reach retirement it’s likely that your attitude to risk and your priorities will change. You may be planning on stopping contributions to your pension when you stop working and generating a stable and sustainable income is likely to become more important than pursuing investment growth at a greater level of risk.
You may need to move your pension funds to a SIPP, revise your investments, or both.
Read more about transferring a pension.
Your drawdown goals
Before you start making investment choices, or choose a new pension provider, you’ll need to decide how you want to withdraw from your pension pot. Do you want to take a regular income, make the occasional withdrawal, or a combination?
This decision will impact which underlying investments you choose.
Taking an occasional withdrawal
Withdrawals should be planned carefully.
- If you need to make an emergency withdrawal you risk having to sell your underlying investments at a market low.
- If you choose income-generating underlying investments and allow the income to accumulate, you can use this accumulation to fund your withdrawals.
Taking a regular income
If you do choose to take a regular income, there are two main ways you can do this:
- Drawing from the natural yield on your investments
- Drawing from the capital
Draw from the natural yield on your investments
You take the income from the yield generated by your underlying investments, known as the natural yield. Underlying investments go untouched so they have the potential for further capital growth which could, in turn, boost your income later down the line. Don’t forget that the value of underlying investments could fall as well as rise though, so this isn’t guaranteed.
Draw from the underlying capital
If the natural yield on your underlying investments can’t support the level of income that you want to take, then you may need to draw from the underlying capital.
You can also choose to use a combination of the above approaches. For example you may take your regular income from the natural yield with the occasional one-off withdrawal from the underlying capital.
If the value of your underlying pension investments stay the same or fall between withdrawals, the value of your pension fund will fall too. A smaller pension fund will mean a smaller natural yield to replenish your fund or generate an income.
If you take withdrawals from your portfolio at a time when markets are falling, the losses will be compounded and the value of your pension fund will be eroded at a faster rate.
Your investment strategy to meet your goals
A financial adviser can help you:
- Set realistic goals
- Devise an [investment strategy] to help you meet them
- Choose underlying investments and a pension product to suit your needs
Alternatively you can use a SIPP to manage your investments yourself, via a DIY investment platform.
You can find out more about what you can invest in via a SIPP by reading our guide to SIPPs.
Review everything regularly
Whether you decide to work with an adviser or go it alone, it’s very important that you regularly review your underlying investments to ensure that they’re performing well and on course to helping you meet your goals.
Last updated: 12 June 2015