The Budget
I will start this week’s Blog with a disclaimer as you might be expecting a Blog today on Rachel Reeves’ second Budget. This will be posted next Friday as at this stage all I could have done is provide you with a list of the main changes, together with my initial observations. Any meaningful comment and advice can only be done once I’ve read the small print in the detailed analysis provided by the Office for Budget Responsibility (OBR) which will not be published for a day or two yet.
Pension drawdown
The Financial Conduct Authority has recently published new data that shows a significant increase in the numbers of individuals using pension drawdown to access their retirement savings. In the tax year 2024/25 over 350,000 accessed a pension drawdown, up by 25% on the year before and up by 80% on 2019-20.
Pension drawdowns are available if you’re in a defined contribution (DC) pension scheme, which is a type of workplace or personal pension where contributions from you, your employer, and the government (via tax relief) are invested to build up a retirement fund. The amount you receive at retirement depends on the total contributions made and the investment performance, not a pre-determined income level.
Increasing popularity
When you come to access money in your DC pension, you can take 25% as a tax-free lump sum (up to a maximum of £268,275) and it’s then up to you how you take the rest of your pot. The choices are to take some or all of it as cash; exchange it for an annuity or leave it invested and take money out when you need (known as a drawdown).
Flexibility is the name of the game and is the big attraction of drawdown. The ability to take income as and when you want, combined with the possibility of your pot continuing to benefit from further growth, has been a big hit with retirees. The ability to pass on the balance to your loved ones after your death has also been seen as an advantage, although this may incur Inheritance Tax when rules change in April 2027.
The downside of drawdown
Opting for a pension drawdown inevitably results in a degree of risk, because the flexibility you have is counterbalanced by the remainder of your pot being at the mercy of the investment markets. If they’re volatile, your portfolio could easily lose a good chunk of its value.
The worst-case scenario is that you may run out of money entirely, either by taking out too much cash or because your investments underperform, or more commonly a combination of both.
You must take advice
The majority of pension drawdown sales (55%+) are undertaken without any expert advice, but unless you have some investment expertise, you really must consider enlisting the help of an Independent Financial Adviser. A comparison site such as Unbiased.co.uk is a good place to start and is a free-to-use service that can connect you with a local independent, FCA-regulated adviser. Alternatively you could try VouchedFor, which has a directory of verified advisers, all of which are vetted, reviewed and monitored.
Check on the charges
It’s a sad fact that a majority of individuals remain with their existing pension provider when opting for a drawdown, but it really does pay to check the market first. This is because fees and charging structures differ significantly between companies. These charges fall into two categories:
- The initial drawdown charge – this charge is usually a fixed fee calculated as a percentage of the money you have invested. This might be a single percentage fee charged on the entire value of your pot, or a range of fees applied to different portions (for example, 0.4% on the first £100,000; 0.3% between £100,001 and £250,000 and so on).
- Annual Fees – You’ll also pay a fee every year, regardless of how your investments have performed, plus there are fund fees on individual investments, plus further charges for buying and selling. The latest analysis shows that these fees can vary by up to 300%.
Those nice people at Which Magazine
As a member of Which for over 20 years I have come to recognise the value of their well-researched articles and the accuracy of the information provided, much of which has proved invaluable in writing today’s Blog.
Which Magazine have published a list of the drawdown providers that they recommend and to get on the list companies need a high customer score of 70%+, and they must also charge competitive fees across six pot sizes (ranging from £50,000 to £750,000). Only six providers have made the grade this year; they are: Transact, Royal London, AJ Bell, Fidelity, Interactive Investor and Quilter.
Accountant’s view
As my pension pot is with Quilter I’m very happy they they’ve made the list, but I may not have chosen them if I hadn’t taken advice from a local independent, FCA-regulated adviser, I strongly advise you to do the same.
