If you have a private or workplace pension, you can enjoy a regular income from it before you reach state retirement age.
The option you choose depends on your financial goals, circumstances and attitude to risk. One popular choice is a pension drawdown, which is sometimes called a flexible retirement income or a flexi-access drawdown. In a nutshell, it allows anyone over the age of 55 to start drawing out some of the funds from their pension pot, with the aim of continuing to grow it. In this blog, we’ll explore what it means in more detail, as well as some of the pros and cons.
Whereas a pension annuity gives you a guaranteed fixed income for the rest of your life, a pension drawdown is a way to draw out money, while still investing the remainder. Our pension drawdown calculator tool can help you to see how much your pension fund could provide you with during retirement.
There is no limit on the amount that can be withdrawn, and it’s also possible to take out a large lump sum using this option. A pension annuity, however, is purchased by withdrawing a pension fund’s full amount, and the pot is then retained by the annuity provider.
So, what is a flexi-access drawdown? When pension drawdown products were first introduced, they were capped, so there was a limit on the amount of income that you could withdraw from your pot every year. On 6th April 2015, when the Pensions Schemes Act came into force, this cap was removed on any new arrangements designated after that date (this post from Money Helper explains more about what a typical pension drawdown involved prior to 2015).
Although it’s a popular choice, not all pension providers offer a flexible access drawdown pension option, so always check your specific plan to see if this is something that you can benefit from.
You can take as much or as little as you like every month but any money you withdraw is taxable at your highest marginal tax rate – we explain this rule, and more, in this video.
Anyone who wants to take out a lump sum from their flexible drawdown pension pot can withdraw up to 25% of it, tax free. Anything else you withdraw after this initial lump sum is liable for tax, based on earnings in the tax year it is taken out.
There are certain rules to be aware of if you decide to take out a tax-free lump sum. If you plan to reinvest that sum into a pension pot, you need to be aware of recycling rules, or risk paying tax on all of the initial tax-free lump sum. The government’s website explains this in full detail, and it’s a good idea to seek advice from a qualified IFA before reinvesting tax-free money into another pension.
When opting for a flexi drawdown pension plan, you can decide what happens to your money when you die, and nominate beneficiaries.
If you die before the age of 75, beneficiaries can access all the funds left in your drawdown pot, tax-free, as long as it is paid within two years of your death. This money can be taken as a lump sum, or as income. But if no action is taken within the two-year limit, it’s no longer possible to take a lump sum, and can only be added to the income of the beneficiary which is then taxed as earnings.
Should you die after 75, beneficiaries have the option to take the money as a lump sum, or as income, taxed as earnings. Some providers may also allow beneficiaries to buy an annuity or continue flexible access drawdown from the same pension pot. If you want your beneficiaries to have this option, make sure you specify this on your plan.
To be eligible for a flexi drawdown pension, there are some minimum income requirements – this article on the government’s website explains more.
If your current provider has the option to set up a flexible drawdown pension, and you meet the specified pension income criteria, then you should be able to use it. Otherwise, you might need to transfer to a different provider. When transfering to a new flexible drawdown pension there can sometimes be charges, and you might lose any guarantees or safeguarded benefits, so always consider the options carefully before taking action.
When transferring to a new provider, many people choose to move their funds in stages. Most plans allow you to move up to 25% as a tax free lump sum, and any amount taken after that will be taxed as earnings.
There are lots of reasons why people decide that a flexible access drawdown pension is the right choice for them.
You can choose whether or not you want a regular income. If you do, then you can set the amount, and review and change it regularly. A flexi-access drawdown pension could also give you more choice over what happens to your money when you pass away compared to an annuity.
This flexibility, as well as the option to take out a large lump sum, also gives you more options for how you spend your money in retirement, meaning you can splurge on once-in-a-lifetime trips or a large-scale investment in, say, property.
After taking out a lump sum or setting up regular withdrawals, you can also choose where the remainder of your pension pot is invested, so there is potential for it to grow in value (but also fall dependeing on the performance of stocks and shares in the fund).
Unlike an annuity, income isn’t guaranteed with a flexi drawdown pension and you could eventually run out of money. You might also trigger a Money Purchase Annual Allowance (MPAA), which means that any tax relief on any money contributed to your pension pot will fall from £40,000 a year to just £4,000 for most people – this guide from Money Helper explains this in more detail.
Please be aware these articles are for general information purposes only and correct at time of printing. We will not accept responsibility for any errors made or actions taken by any readers that have acted on the information contained. Answers given are for guidance only and specific advice should be taken before acting on any of the suggestions made. All information is based on our understanding of current tax practices, which are subject to change. Always remember when investing, past performance is not necessarily a guide to future performance and the value of some investment units can fall as well as rise.
