What you and your employees need to know about drawdown
Neil Hugh | July 17, 2020
Time to read: 5 minutes
Neil Hugh, Head of Proposition Strategy and Development at Standard Life Assurance Limited, shares some important things you and your employees should know about drawdown as a retirement option. He also explains how Standard Life can help support you and them along the way.
Since pension freedoms were introduced back in 2015, we’ve seen a clear shift in the way people are choosing to take their pension money. With more flexibility, people are tending to keep it invested and take a flexible income – commonly known as drawdown.
Choosing drawdown as a retirement option means your employees can take as much as they like from their pension plan, when they need it. The rest stays invested but, remember, as with any investment, future growth isn’t guaranteed. Its value can go down as well as up and it could be worth less than what was paid in.
You might find that your employees ask you about their retirement options and many of them will choose to use drawdown. So it’s important that you’re aware of a few key things about it, which can help them achieve a good retirement outcome.
1. Their money stays invested
With drawdown, your employees’ pension money stays invested. Because of this, there are a few things they should keep in mind.
First, the value of their pension plan will move in line with market fluctuations, meaning it could go down as well as up. When this happens it can be a bit unnerving, but when it comes to investing, it’s important for your employees not to worry too much about short-term fluctuations and focus on taking a long-term view instead. This is because even when markets have short-term setbacks, history shows us that they recover in the long term, although remember that past performance isn’t a reliable guide to future performance.
The amount that their pension value goes up or down by will be affected by the investments they’re in. So it’s important that your employees regularly review their investments to make sure they still suit their goals and needs as they go through different stages in their lives.
Leading up to retirement, many of your employees are likely to be invested in your scheme’s default investment option or another lifestyle profile, which can help make sure that their pension money is in the right investments for their retirement plans, including drawdown. The advantage of lifestyle profiles is that they automatically move your employees’ money into lower risk funds as they get closer to their retirement age, which in turn can help to minimise the impact of market fluctuations.
2. There are tax implications
Your employees can usually take 25% of their pension money tax free, and they don’t have to take the whole 25% in one go. They can also generally dip in and out and take it over a longer period of time too, although some providers may have restrictions on this.
It’s important that they understand they may need to pay income tax on the remaining 75%. This means that if they choose to take all of their pension money at once, they could pay more income tax than they need to. If they take it over a number of years, it’s likely to be more tax efficient, which means they’ll get to keep more of their money.
Also, as soon as they take any income, the amount that can be paid into their pension plan in the future is restricted – which is an important consideration if they’re planning to continue to work and save more into it. The standard amount that can usually be paid into a pension plan is £40,000 a year, but this goes down to only £4,000 a year if they’ve taken more than their 25% tax-free amount.
3. When they take their money matters
Drawdown gives people the flexibility to start taking their pension money while they’re still working. But, unlike an annuity, it doesn’t guarantee them an income for life. And with people generally living longer, your employees may need their pension money to last them a number of decades.
This is an important consideration when they’re deciding when to take their money. How much they take at the start could affect how much they have left to live on later, particularly if they take it out when markets are volatile like they currently are.
This is because once they’ve taken money out, they’ll have less money remaining invested to recover potential losses if and when markets (and their investments) rise again in value. In turn, this might affect how long their money lasts.
How Standard Life can help
With so much to think about when it comes to retirement and drawdown, we want to help make that next step easier for you and your employees. We recently launched our latest propositional enhancement – in-scheme drawdown. This is currently available to our DC Master Trust members and will follow for Group Flexible Retirement Plans early next year. This will help you support your employees who are either nearing retirement or who want to access their pension money while continuing to work and pay in contributions.
With in-scheme drawdown, we’re aiming to improve your employees’ experience and make sure they’re supported along the way. They’ll no longer need to change contracts to be able to use drawdown, and they’ll continue to benefit from in-scheme discounts.
To make sure your employees are well-informed and understand their options, our in-scheme drawdown journey gives helpful information at every stage, right from the start.
The views expressed in this blog should not be regarded as financial advice.
Tax rules and legislation can change. Information is based on our understanding of laws and current HM Revenue and Customs practice as at July 2020. Your employee’s individual circumstances, including where they live in the UK, will have an impact on the tax they pay.
Any external links provided are for general information purposes only. Standard Life accepts no responsibility for information contained in the site or for the site not being available at all times.
It’s important to remember that a pension is a long-term investment and as such its value can go down as well as up. It could even be worth less than was paid in.