Understanding drawdown

What is drawdown?

A drawdown is basically a flexible income. Your Personal Retirement Account (PRA) remains invested in funds specifically designed for that purpose. And you take out cash whenever you want to, up until your PRA runs out.

How much can you get with drawdown?

How much you get from a drawdown, depends on:

  • how much is in your Personal Retirement Account (PRA)
  • how well the funds perform for the money that remains invested

What are the types of drawdown available?

There are two main types of drawdown available:

  • Flexi-access drawdown (FAD) - allows you to take a 25% lump sum tax free up front. The rest is invested for you to take when you want it.  This can be regular payments, or just as and when you need it. Any income you receive after the tax free lump sum is subject to the normal income tax rates.
  • Uncrystallised funds pension lump sums (UFPLS) - allows you to take your pot in one go, or as a succession of lump sums.  For example you may choose to spread your entire PRA across 3 lump sums. 25% of each lump sum will be tax-free and the rest is subject to tax.

A third option, the capped drawdown, was closed in 2015 and is no longer accepting new applications. If you already have a capped drawdown it should continue under the existing rules. Please speak to your provider for details.

What are the main benefits of drawdown?

  • You have flexibility over how and when to take your money, giving you greater control
  • The value of the money in your pot could go up. This is because initially, most of it may remain invested.
  • If you’re getting close to a higher tax threshold, you could reduce the amount you’re taking with drawdown.  This could then keep you under the tax limit.
  • If you die, any money left in your pot can be passed to your spouse or dependents.  If you die before 75 this may be tax-free. If you die after 75, tax will be based on the recipient’s normal tax rates. 
  • You can still use the money in your drawdown account to buy an annuity, or other type of retirement income product, at any time. However, you will not be eligible for another tax free lump sum if you choose this option. You can find out more about annuities here
  • You can decide to take 25% of your PRA as a tax-free lump sum and take the rest as drawdown

What are the risks with drawdown?

  • The value of your pot can go up or down. This is because some of it remains invested. So it’s important you monitor investment performance
  • You will pay tax on any income outside of the 25% lump sum allowance and may pay a higher rate of tax if you take out a large amount
  • If you take any money above your tax-free allowance (25% of your pot), your annual tax allowance could also reduce (as this triggers the Money Purchase Annual Allowance – MPAA). This may be problematic if you plan to continue paying in or leave part of your pot invested
  • Your pot could run out before you die, so it’s important to consider life expectancy and how long your money might need to last

Is drawdown right for you? 

You may wish to speak to an Independent Financial Advisor (IFA) before making any final decisions.

Liverpool Victoria (LV) has been chosen as the official partner to give RPS members access to financial advice. LV can be contacted on 0800 023 4187. 

 You are still free to choose your own Independent Financial Adviser (IFA). You can find an IFA in your area at unbiased.co.uk

A range of planning tools are also available in your myRPS account to help you consider your options. For DC members this includes:

  • a retirement modeller - showing what your pension pot might be worth when you retire and the different ways you can choose to use that money.
  • a retirement budgeting calculator – showing how much money you might need for your retirement.

Login or register for your myRPS account here to find out more.

Our drawdown arrangement with Legal and General Investment Management (LGIM):

The Railways Pension Scheme (RPS) does not offer drawdown directly.

If you’re considering this option, you will need to transfer money from your Personal Retirement Account (PRA) and set up drawdown with another provider.

The Trustee has appointed Legal and General Investment Management (LGIM) to offer members access to a drawdown facility.

Drawdown is one of the options available for taking your benefits, if you:

  • are a member of the Industry-Wide Defined Contribution (IWDC) section
  • have additional voluntary contributions (AVC), like BRASS or
  • are a DB member considering a transfer to a DC pension  

You can find out more about how it works here.

The RPS does not offer drawdown directly, so the partnership with LGIM means members considering drawdown can avoid the open market and access a high-quality arrangement, with preferential fees that are not available elsewhere. 

What does LGIM offer? 

When you retire, a drawdown arrangement will allow you to take out cash whenever you want to, up until your pot runs out. In the meantime, the rest of your money remains invested in funds specifically designed for that purpose. 

With LGIM, you have a range of options for your investment funds. 

The default is LGIM’s flagship product, the Retirement Income Multi Asset (RIMA) Fund. 

This has been specially design for longevity and to protect members from any downturn in investment performance. 

It costs 0.66% to invest in RIMA, including an annual management charge of 0.35% and a fund management charge of 0.31%. 

We understand these fees may appear a little higher than other competitors on the market. If you prefer to look elsewhere, make sure you are comparing like for like in terms of administration fees, as well as investment fund charges and performances. For example some funds are not actively managed so can be offered cheaper but may not perform as well. When choosing a provider you should also be aware of hidden charges, such as administration fees for switching funds. 

If you don’t select a fund, or actively chose not to, then your investments will automatically default into RIMA. 

If you would prefer to make your own investment choices, LGIM has more than a dozen options available. This includes some cheaper alternatives, as well as some that are passively managed. If you select a fund other than RIMA, fees will differ from those quoted above. 

You can read more in the Investment Guide, available through LGIM’s document library here. 

Do I have to use LGIM for drawdown? 

LGIM was chosen as the preferred drawdown option for members, following a detailed selection process, which highlighted its results and competitively priced services.

You are still free to shop around with other providers and you can compare your options with the Money Advice Service here. 

What should I do if I’m considering drawdown?

A range of planning tools are available in your myRPS account to help you consider your options. This includes:

  • a retirement modeller (for IWDC members) - showing what your pension pot might be worth when you retire and the different ways you can choose to use that money
  • a pension planner (for DB members) - to show how much your pension might be worth when you stop work
  • a retirement budgeting calculator – showing how much money you might need for your retirement.

You may also wish to speak to an Independent Financial Advisor (IFA) before making any final decisions.

Liverpool Victoria (LV) has been chosen as the official partner to give RPS members access to financial advice. LV can be contacted on 0800 023 4187. You are still free to choose your own Independent Financial Adviser (IFA). You can find an IFA in your area at unbiased.co.uk.

IWDC members do not need to seek advice to use the drawdown facility. However, if you’re a DB member considering a transfer to a DC arrangement and have a pension pot worth more than £30,000, then you are legally required to seek financial advice before this can go ahead. You can find out more about transferring your pension here.

What if I don’t want drawdown?

Details about the other options available to you in retirement, including annuity and encashment, can be found here.

Whenever you take money from your Personal Retirement Account (PRA) to invest somewhere else, like a drawdown, you should also be aware of the risk of scams and proceed with caution. You can find out more here  

Are there alternatives to drawdown?

Yes – if drawdown isn’t right for you, then you can consider:

  • getting a guaranteed income, known as an annuity
  • taking all of the money in your PRA as a cash lump sum.  We call this total encashment

You can find out more by clicking here.