My Experience of Putting My Pension into Drawdown

Nick Pensions & Benefits pensions 7 Comments

I recently decided to take the plunge and put my personal pension into drawdown. As I know many Pounds & Sense readers will be thinking about doing this (sooner or later), I thought I would share my experience of the process here.

To give you some background, I am 62 and a semi-retired freelance writer. I still do some writing work – and run this blog! – but that doesn’t in itself produce enough income to live on. I am fortunate to have some savings and investments, but won’t qualify for my state pension until I am 66 (in about three-and-a-half years).

I do have a SIPP (Self Invested Personal Pension) with Bestinvest, though, so I decided I would put this into drawdown to give me another source of income. As you will know if you read this recent post, drawdown is one of the options open to you if you have a defined contribution pension. Once you are 55 or older, you can withdraw a quarter of your pension pot tax-free and (if you opt for drawdown) take a taxable income from the remainder. The balance stays invested until you withdraw it, and hopefully continues to grow.

Mine is not a massive pension pot – it came to about £56,000 – but my financial adviser and I worked out that if I draw £200 a month, assuming average growth of the remaining investments in my portfolio, it should last me until I am well into my 80s. I will also have the option to reduce the amount I draw once my state pension kicks in and/or to top up my pension fund to a modest degree in later years (see below). Yet another option will be to use the balance in my pension pot 10 to 15 years down the line to purchase an annuity, by which point the rate available on this will be higher.

The Process

I have been managing my SIPP online for over 10 years, but there wasn’t much on the Bestinvest website about how to put it into drawdown. So I phoned them up and asked.

The woman I spoke to said they would email an application form. This duly arrived as a PDF. I was pleased to discover that I could complete it on my PC (I use the free Foxit Reader for reading and editing PDFs).

The form had 10 pages. As well as the usual personal information, it wanted to know how much I wanted to draw from my pension and at what intervals. It also asked whether I wanted to take the tax-free lump sum straight away (I said yes).

The other things the form asked were a bit less predictable. There were quite a lot of questions about other pensions I might have. This didn’t apply to me, but they have to ask in order to check that you aren’t exceeding your lifetime allowance of just over a million pounds (I wish!).

The form also asked whether I had taken advice from the government’s Pension Wise service and/or an independent financial adviser. This did strike me as a bit nanny-ish, but as it happened I was able to say yes to both.

Clarifications

There were a few things I wasn’t clear about, so I phoned Bestinvest back and asked them. Here’s what I discovered. I hope this information may be useful to anyone who is in this situation or will be soon, as it doesn’t seem to be widely known.

First of all, I assumed that when paying out from my pension, my provider would simply sell off funds on a pro rata basis (I have about a dozen funds and shares in my pension account). This turned out not to be the case, though.

The woman at Bestinvest explained they don’t do this, as people often have their own views on which funds they want to sell and which they want to keep long term. So she told me I should sell enough funds via the BI website to cover my lump sum and also to cover my monthly payments going forward. To avoid delays she advised me to do this as soon as possible.

I therefore sold around £15,000 worth of funds from my account, to cover the lump sum I was withdrawing and the first few monthly payments. As the months go by I will obviously need to sell more of my holdings, but hopefully the cost will be balanced to some extent by the value of my remaining holdings going up.

I also discovered that my online account would continue to function exactly as it did before going into drawdown. The only difference is that the government imposes a lower limit of £4,000 (including tax relief) for any further investments in a SIPP after you have “crystallised” your pension (i.e. started drawing a taxable income from it). This rule is to avoid people withdrawing large sums and immediately reinvesting them to get another big chunk of tax relief, which I guess is fair enough. In any event, it’s good that I will have the ability to top up my pension from my other savings and investments by a few grand a year in future if my remaining pot starts to shrink too much.

After all this I submitted my form, and everything so far has gone as promised. It took about a month for the tax-free lump sum to appear in my bank account, and around six weeks to get my first monthly payment. I had heard some horror stories about large “emergency deductions” being made from the latter by HMRC to cover any possible tax liability, but discovered they weren’t applying any deductions at source to my payments. Of course, I will have to add this money to my total taxable income for the year, and if it exceeds my personal allowance I will have to pay tax on it.

So that was my experience of putting my Bestinvest SIPP into drawdown. As of August 2018, I can legitimately describe myself as a pensioner! If you have any comments or questions, naturally, please do post them below.

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