April 2015 saw some of the most radical changes to pensions come into effect giving us more freedom and flexibility than ever before. We can now choose exactly how we use our pension once we retire; great news all round.

The problem is that with freedom comes choice and choice can be a tricky thing, especially when it comes to pensions. How do you decide what the best option is when there is no way to predict what the future will bring?

Drawdown pensions allow us to take income from our pension, as and when we need it. Sounds brilliant in theory? The biggest issue is that there can be a lot of risk involved. As we don’t know how long we will live, we could take too much out too soon and leave ourselves little to live on in later life.

That said; there are many benefits to drawdown pensions and if managed carefully this could be the right option for you.

A big advantage of the drawdown pension is that you can change how much income you take each year. This is good news if you are still working. You can choose not to take anything whilst you’re still earning a salary or you can top up your income.

Another option is to reduce the hours you work and replace the lost income with income from your pension instead. Once you leave employment you can choose to withdraw more, buy an annuity or top up with other pensions and savings. You do need to be aware of the income tax thresholds to make sure you don’t jump from 20% to 40% income tax but as long as you plan wisely this can be easily avoided.

As your circumstances change you can increase or decrease the income you draw from your pot. Some people choose to just take out the income they have made on the investments which reduces the chances of you running your pot down too quickly.

There is also the option of taking a cash lump sum. You can take 25% of your pension pot tax free at the point of retirement. This is useful if you want to clear your mortgage, take a trip, make a big investment or just have a bit of a splurge.

Taking the lump sum is optional, you may prefer to make smaller withdrawals as and when you need them.

Whatever you don’t withdraw from your pot is invested; usually in the same way as it was invested before you retired, probably in stocks and shares. This could mean that your pension grows even further but as with many investments it can also carry a risk. The stock market is volatile and there is a chance your investment may not grow as quickly as you hope and could even reduce in value.

Another appealing aspect of the drawdown option is that if you die your loved ones will inherit the pot. This means that it’s your family that benefit from all your years of saving rather than pensions providers. Of course we hope that you’ll live for many years after retirement but it’s always good to know loved ones will be provided for if the worst happens.

Drawdown pensions aren’t for everyone and you should seek independent financial advice if you’re considering this option. You need to give proper thought to planning your income after retirement and protecting your future finances. It’s important to consider all the options carefully.

If you’d like friendly, professional advice on pensions, or any aspect of financial planning, then Rockwood Financial Solutions would love to hear from you. We believe in working with our clients to find options that best suit their individual requirements, and we can help you too. Contact us today to find out more.

Nothing in this blog constitutes financial advice or recommendations, for more information please contact Rockwood Financial Solutions on 0330 332 2679.