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.

How do you take drawdown?

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 is proud to be partnering with Legal and General Investment Management (LGIM) to offer members access to its flagship product, the Retirement Income Multi Asset (RIMA) Fund

This is a high-quality, drawdown arrangement, with preferential fees, that are not available elsewhere.

To find out more information about this arrangement please visit - https://www.legalandgeneral.com/workplace/campaigns/rpmi-pas/

You are still free to shop around with other drawdown providers and you can compare your options with MoneyHelper here 

Remember, the income and additional features you receive, and the fees you need to pay, can vary widely from provider to provider.  There may also be different qualifying criteria in place. 

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