How Pension Drawdown Works
Accumulation versus drawdown
Sources of retirement income
So, assuming you elect not to hand over your money to a life assurance company in return for an agreed income (an annuity) having taken your 25% tax-free lump sum, how does the drawdown route work? The answer is complex so here is a simple example.
Let’s say you have a £200,000 pot on retirement. Your options could be summarised as;
- Living off capital
- Living off income
- Living off a mixture of the two
For many retirees the last route will be the most likely, since a pure cash-based capital-only solution is likely to be too cautious and an income-only route may not provide enough annual funds in a low yield world. The key question then becomes – how much can I afford to draw down on a mixed basis so that my pot lasts long enough?
The answer depends on several factors, including the number, size and timing of any one-off large capital drawdowns in the future and the overall growth rate you achieve on your invested capital. Over a chosen 30-year period, this growth rate will affect your annual drawdown as follows;