Don't be shy, ask ii...how does pension drawdown work?

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David Williams asks: as part of my planning for retirement, I would appreciate some clarity as to how pension drawdown works; I have a specific plan in mind and I am trying to determine if such a plan would be possible under current government pension rules. I have read the information provided on the ii website, government Pensionwise site and others, but really am looking for clarity around a specific example as below.

With a future pension pot self-invested across equities and funds, which return a % yield into the pot each year from dividends, I would be looking to solely take out some/all of the dividend value from my pot, leaving the investment capital untouched and the holdings remaining in place to accrue further dividends in future. Would such an approach be possible?

If the approach above is allowed under current rules, how would such an approach be considered? My confusion is around what is classed as drawdown and what as uncrystallised, and how I can keep my investments intact and earning dividends, while removing some of the said dividends each year?

Becky O’Connor (pictured above), head of pensions & savings, interactive investor, says:  it can be confusing trying to work out the best, most tax-efficient way of accessing your pension. The approach you have laid out is possible. You can keep the capital element of your investments untouched and draw dividends for income through your SIPP. This approach is allowed through drawdown. You can designate a drawdown amount, which could be equivalent to the value of the dividends you want to take. This can be part of your ‘Pension Commencement Lump Sum’ (PCLS), which can be up to 25% of the value of your pension entitlement. You can then access the cash from this pot.

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Alternatively, you can use ‘Uncrystallised Fund Pension Lump Sums’ (UFPLS). For each of these, 25% is tax-free and the rest taxed at your marginal rate. These can be taken from the ‘cash’ part of your SIPP holdings. You can transfer the dividend amount from your investment holdings to your cash balance at any point. 

For more on drawdown, visit https://www.ii.co.uk/ii-accounts/sipp/income-drawdown. For information on UFPLS, have a look at https://www.ii.co.uk/ii-accounts/sipp/ufpls. Bear in mind there can be a time lag between when you apply for the access and when it is made available to you – this will require a bit of planning ahead.