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How to review a drawdown pension

A 7-point plan

Review drawdown pension banner

How to review a drawdown pension

A 7-point plan

Important information: This isn’t personal advice. What you do with your pension is an important decision. You should check you're making the right decision for your circumstances and that you understand all your options and their risks. The government's free and impartial Pension Wise service can help you and we can offer you advice if you’d like it.

1. Check your objectives and attitudes to risk

It’s important that your investments still match your goals and attitude to risk. Your objectives and the level of risk you’re comfortable with could change over time.

Review whether the drawdown investments you hold are still fit for purpose and complement your own aims. When saving for retirement, the type of investments you might choose are likely to be different to the ones you might pick when drawing an income. For instance, if you need an income from your drawdown pension, you could look at investing in income funds which aim to pay a high dividend.

Just remember, the value of any investment, including the income it produces, can fall and rise. You could get back less than you invest. It’s important to make your choices carefully.

Drawdown investment ideas

2. Review the performance of your investments

Looking at the performance of investments can help you to understand your own portfolio, as well as help you to better understand how different stock markets and sectors are performing.

You can find information about any funds you hold on most fund factsheets. We also offer share insight and fund research which could help.

Past performance isn’t a guide to how your investments will perform in future.

3. Rebalance your investments

It makes good investment sense to choose a diverse mix of investments. It can help to reduce risk. But if you’re holding several different investments it’s likely that they’ll have grown at different rates and so may be out of kilter. This makes it vital to rebalance your investments.

Rebalancing involves selling a little of what has done well and reinvesting elsewhere to top up investments that may have performed poorly. This helps keep the portfolio on track to achieve your objectives.

4. Have a plan for your income withdrawals

There are three main withdrawal strategies; not taking anything, just withdrawing the income your investments produce, or taking a planned income. How much you withdraw is likely to depend on your changing circumstances as well as how long you need your drawdown pension to last, whether you plan to pass it on to your loved ones and how well your investments perform.

Whenever your circumstances change, you’ll need to adapt your plan appropriately and review the level of your withdrawals. For instance, you might need to withdraw more income because you’ve reduced your hours at work.

To check how long your pension might last, try our drawdown calculator. It can help you to decide what income withdrawals could be sustainable and see how different growth rates could affect your fund value.

Drawdown calculator

5. Don’t forget about tax

After any tax-free cash entitlement, all your other drawdown withdrawals will normally be taxed as income. Any income you take will be added to any other income you receive in that tax year. If you’re planning larger withdrawals, be careful not to push yourself into a higher tax bracket by mistake. Remember, pension and tax rules can change, and benefits depend on your circumstances.

Guide to pension income tax

1-3
YEARS'
worth of expenses held as a cash buffer

6. Keep a cash buffer

It’s important to stash some cash away for a rainy day. In retirement we think it’s sensible to have at least 1-3 years’ worth of expenses held as cash.

This may seem broad, but a lot depends on your circumstances and where your income is coming from in retirement. If all your spending is covered by the state pension, Defined Benefit (DB) pension scheme or an annuity, you may only need to hold one year of expenses. But if all your income is coming from drawdown and remains invested, then you may want a larger buffer, say 2-3 years, in case of sudden drops in the market or investment income.

On top of this, you should hold enough cash to cover any spending you plan to take from capital over the next five years. For example, if you’re planning a kitchen renovation or you want to go on a big trip aboard.

How much cash should I hold?

1-3
YEARS'
worth of expenses held as a cash buffer

7. Get a free annuity quote

You’ve still got the option to use the money in your drawdown pension to buy an annuity. This will provide you with a secure income for the rest of your life. Annuity rates are always changing so it’s worth getting an up-to-date quote to see how much income you could get - plus it’s free.

An annuity purchase doesn’t need to be all or nothing either. A sensible approach could be to look at buying smaller tranches of annuities as you grow older. The older you are, and the more health conditions you develop, the more income you’re likely to get.

Annuity rates change regularly and may go up or down in the future. Once set up an annuity cannot normally be changed so it’s important to consider your options carefully.

More on annuities