Understanding drawdown

As a member of the IWDC Section, there are different ways you can take your pension pot (known as your Personal Retirement Account). One option is to use 'drawdown'. But what is drawdown and how does it work?

Contents

A drawdown is basically a flexible income. Your IWDC pot (known as your Personal Retirement Account or PRA) remains invested in funds specifically designed for that purpose. You take out cash (drawdown on your pot) whenever you want to, until your pot runs out.

Select from the following topics to find out more.

Two brown sacks, tied at the top, each with a pound sign on the front.

How much can you get with drawdown?

How much you get with drawdown, depends on:

  • how much is in your Personal Retirement Account (PRA)
  • how well the funds perform for your 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 25% as a tax-free, lump sum, upfront (up to a maximum of £268,275 unless you have a higher protected amount). 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 payments you receive after you have taken 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 series of lump sums. For example, you may choose to spread your entire pot across 4 lump sums. In this case, 25% per cent of each lump sum (but no more than £268,275 unless you have a higher protected amount) will be tax free and the rest is subject to tax.

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. 
  • 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 dependants. 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 dates.
  • You can still use the money in your drawdown pot to buy an annuity, or another 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. Find out more on the understanding annuities page.
  • You can decide to take up to 25% (but no more than £268,275 unless you have a higher protected amount) of your IWDC pot as a tax-free lump sum and take the rest a bit at a time 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% (or £268,275 unless you have a higher protected amount) lump sum allowance and may pay a higher rate of tax if you take out a large amount.
  • If you take any money above the tax-free limit (25% of your pot, but no more than £268,275 unless you have a higher protected amount), 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 how long your money might need to last and other sources of income that you may have.

Is drawdown right for you?

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

Liverpool Victoria (LV) has been chosen as the official partner to give Railways Pension Scheme 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 on the Unbiased website. 

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

  • a DC Retirement Modeller — showing what your IWDC pot might be worth when you retire and the different options you can choose from. You'll need to log into your myRPS account and go to the 'Planning for the future' area of your account to use the modeller.
  • a Retirement Budgeting Calculator — which estimates how much you may need for the lifestyle you want when you retire.

Log in to your myRPS account to try the tools now.  

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

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

If you're considering this option, you will need to transfer money from your IWDC pot to another provider that provides drawdown options.

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

    Find out more about the LGIM drawdown facility. 

    As the Railways Pension Scheme does not offer drawdown directly, the partnership with LGIM means members who are considering drawdown can 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 until your pot runs out.

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

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

    This has been specially designed for the long term, 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 a number of 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 via LGIM’s document library. 

    Do I have to use LGIM for drawdown?

    LGIM was chosen as the preferred drawdown option for members, following a detailed selection process. You are still free to shop around with other providers.

    You can compare your options with Money Helper's drawdown comparison tool. 

    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 DC Retirement Modeller — which estimates what your IWDC pot might be worth when you take it and the different ways you can choose to use that money, and
    • a Retirement Budgeting Calculator — which estimates how much you may need for the lifestyle you want when you retire

    You may also wish to speak to an Independent Financial Adviser (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 on the Unbiased website.

    What if I don't want drawdown?

    Learn more about the other options available to you in retirement using the links below. 

    Whenever you take money from your IWDC pot, and whichever option you choose, you should always be aware of the risk of scams and proceed with caution. Find out how to protect yourself on the scams page. 

    Are there alternatives to drawdown?

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

    You can read more about your options on the how I can take my IWDC pot page.  

    What to read next

    Understanding annuities

    Learn more about taking your IWDC pot to purchase an 'annuity', which will give you an income either for life or for a set amount of time.

    Understanding encashment

    Learn more about taking your entire IWDC pot as a cash payment. This is known as encashment.

    Your Retirement Modeller

    Log in to your myRPS account and find the Retirement Modeller under 'My Library' to see what your Personal Retirement Account could be worth when you take it, and your options for how you take it.