How and When Should You Draw Down Your Pension?

When Should You Draw Down Your Pension? Well there are some considerations, once we understand ‘When’, we can then look at the ‘How’.

Thinking about retirement can spark both excitement and uncertainty. Your pension is a key part of this journey. It offers significant advantages, including tax relief on contributions, tax-free growth, and the ability to take a tax-efficient lump sum at retirement. But how and when should you draw it down? It’s not just about accessing funds—it’s about ensuring they last throughout your retirement. Here’s a breakdown of what you need to know.

Different Types of Pensions

Before you decide when to draw down, it’s essential to know what type of pension you have. The most common types in Ireland include:

• Master Trust: A pension scheme set up by employers, typically for groups of employees.
• Personal Retirement Savings Account (PRSA): A flexible pension option available to individuals, whether employed or self-employed.
• Personal Retirement Bond (PRB): Also called a Buy-Out Bond, this allows you to transfer benefits from a previous occupational pension into your own name.
• Auto-Enrolment (AE): A government initiative aimed at automatically enrolling workers into a pension scheme, expected to launch in 2025. Details are still being finalised.

Personal and Executive pensions are no longer available to setup, but existing ones can still be drawn down.

When Can You Access Your Pension?

Each type of pension has different rules around when you can draw it down:

• Master Trust & PRSA: Generally accessible from age 60. However, you may access it from age 50 if you’ve left the employment funding the pension (Master Trust) or all employment (PRSA).
• Personal Retirement Bond: Can often be accessed from 50
• Auto-Enrolment: Likely tied to the State Pension age, which is currently 66.
• State Pension: Paid from age 66 currently, though this may change.

When drawing down your pension, you can take:

1. A Tax- Efficient Lump Sum: Up to 25% of the fund or based on salary and service, in some cases it can be whichever is higher.
2. Income Options: With the balance, you can either purchase an annuity (guaranteed income for life) or invest in an Approved Retirement Fund (ARF), which offers flexible withdrawals, potential investment growth and enhanced legacy planning opportunities.

Why Might You Draw Down Early?

Sometimes, early access may be necessary:

• Health Reasons: Serious illness or reduced life expectancy.
• Debt Management: To pay off significant debts.
• Early Retirement: Funding a lifestyle change or early retirement dream.

However, withdrawing early means giving up potential tax-free growth and facing higher taxes.

Why Delay Drawing Down?

Pensions are a tax shelter, the longer you leave funds invested, the more they can potentially grow tax-free. Delaying drawdown also defers income tax, helping with tax planning and boosting your overall retirement savings.

The Importance of a Personal Plan

There’s no one-size-fits-all approach to drawing down your pension. The right timing depends on your long-term financial goals, lifestyle, and needs. Working with a Financial Planner ensures your decisions align with your long-term plans.

Thinking about your next step? Speak to a Financial Planner and make informed choices about your future.