How to transfer a drawdown pension

Learn how you can transfer 75% of your pension to a drawdown pension plan and how this could benefit you in retirement. 

What is a drawdown pension?

Once you have reached the UK retirement age (currently 66 for men and women, but this is set to rise), you can withdraw 25% of your pension as a lump sum, tax-free.

The remaining 75% can be transferred to a drawdown pension plan.

After your initial 25% withdrawal, you may choose to withdraw the remaining 75% of your pension as a one-off taxable lump sum, invest it in an annuity, or transfer it to a drawdown pension plan. 

It’s worth talking to a financial adviser before deciding how to access your pension (you can choose a few of the above rather than one) so you don’t end up with a hefty and avoidable tax bill.

The primary benefit of a drawdown pension over other pension income strategies is its flexibility. You can withdraw funds from your drawdown pension as and when you need them.

There are two different types of drawdown pensions, which we explain below.

But before we jump in, please note you can no longer enter a new capped drawdown pension.

Capped drawdown

There is a limit on the maximum amount that you can withdraw with a capped drawdown transfer. This limit is equal to 150% of the amount you’d have received if you purchased an equivalent lifetime annuity.

Provided you remain within your income limit, you can retain your annual £60,000 allowance.

If you exceed your maximum income limit, your plan will automatically convert to a flexi-access pension.

As of 2015, you can no longer enter a new capped drawdown pension, so the above only applies to existing capped drawdown transfers. You can arrange with your provider to convert your capped drawdown pension to a flexi-access pension.

Flexi-access drawdown

Formerly known as flexible drawdown pensions, flexi-access drawdown pensions have no maximum withdrawal limit. 

When you start taking money out of a flexi-access drawdown pension, you trigger what’s called the money purchase annual allowance (MPAA). This means you will only be able to pay in up to £10,000 a year and claim tax relief on your pension contributions. 

Flexi-access drawdown is now the only available drawdown option.

What do I need to consider when transferring my drawdown pension?

Before you transfer the remaining savings in your pension into a drawdown account, you should weigh all of your options.

In particular, you should consider the fees, tax implications, and potential loss of benefits.

For example, your current provider may charge an exit fee if you transfer your funds to a new provider. You may also have to forego various benefits, such as a guaranteed annuity rate or life insurance.

If you opt to transfer your pension savings into drawdown and then spend too much too quickly, you risk running out of money to fund your retirement.

Learn more: what are the best annuity rates?

You should also remember that not all drawdown pension plans charge the same fees, so comparing fees is vital.

It is essential to consider the investment risk when transferring your drawdown pension, as this may impact how much you have in your pot. 

With so much to consider when transferring your pension, it’s wise to talk to a financial adviser.

How do I transfer my drawdown pension?

If you’re ready to transfer your pension into drawdown, you need to take the following four steps:

1. Request a pension statement from your current provider.
2. Use a pension calculator to establish your expected annual income from your current provider.
3. Calculate your income requirements.
4. Consult a financial adviser. 

If you opt for a pension transfer as cash, you should have your funds within 10 business days. Drawdown transfer into other investments will take considerably longer.

Want to learn more about pensions?

Knowing how to transfer a drawdown pension and its pros and cons are an excellent starting point for exploring your pension investment options.

Your pension needs to support you throughout retirement, and calculating your costs and needs is essential for a sound financial future. 

If you want to learn more about pensions and need expert advice, let Unbiased match you with a financial adviser that meets your requirements.