With flexi-access drawdown, when you come to take your pension you reinvest your pot into funds designed to provide you with a regular retirement income. This income may vary depending on the fund’s performance and it isn’t guaranteed for life.
- How flexi-access drawdown works
- Things to think about
- What tax will I pay?
- Tax relief on future pension saving
- What happens when you die?
- Is Flexi-access drawdown right for me?
- Your other retirement income options
How flexi-access drawdown works
You can normally choose to take up to 25% (a quarter) of your pension pot as a tax-free lump sum. Some older policies might allow you to take more in tax-free cash – check with your pension provider.
You then move the rest into one or more funds that allow you to take a taxable income at times to suit you. Increasingly, many people are using it to take a regular income.
You choose funds to invest in that match your income objectives and attitude to risk and set the income you want.
The income you receive might be adjusted periodically depending on the performance of your investments.
Once you’ve taken your tax-free lump sum you can start taking the income right away or wait until a later date.
You can also move your pension pot gradually into income drawdown. You can take up to a quarter of each amount you move from your pot tax-free and place the rest into income drawdown.
Using drawdown funds for other products
To help provide more certainty, you can at any time use all or part of the funds in your income drawdown to buy an annuity or other type of retirement income product that might offer guarantees about growth and/or income.
What’s available in the market will vary at any given time so you’ll need to discuss your options with a financial adviser.
Things to think about
You need to carefully plan how much income you can afford to take under flexi-access drawdown otherwise there’s a risk you’ll run out of money.
This could happen if:
- You live longer than you’ve planned for
- You take out too much in the early years
- Your investments don’t perform as well as you expect and you don’t adjust the amount you take accordingly.
If you choose flexi-access drawdown, it’s important to regularly review your investments.
Unless you’re an experienced investor, you might need help from a regulated financial adviser to help with this.
Not all pension schemes or providers offer flexi-access drawdown.
Even if yours does, it’s important to compare what else is on the market as charges, the choice of funds and flexibility might vary from one provider to another.
Comparing products yourself will be difficult but a financial adviser can do this for you. It’s the adviser’s job to recommend the product that is most suited to your needs and circumstances.
What tax will I pay?
Any money you take from your pension pot using income drawdown will be added to your income for the year and taxed in the normal way.
Large withdrawals could push you into a higher tax band so bear this in mind when deciding how much to take and when.
If the value of all of your pension savings is above £1,030,000 when you access your pot (2018-19 tax year) further tax charges might apply.
Tax relief on future pension saving
You can normally get tax relief on pension contributions to a defined contribution pension scheme of up to £40,000 or 100% of taxable salary each year (if lower than £40,000). This is known as your Annual Allowance.
However, if you start to draw an income from a Flexi-Access drawdown scheme the amount you can pay into a pension and still get tax relief reduces. This is known as the Money Purchase Annual Allowance (or MPAA).
The MPAA for the tax year 2018-19 is £4,000.
If you want to carry on building up your pension pot this might influence when you start taking income.
What happens when you die?
You can nominate who you’d like to get any money left in your drawdown fund when you die.
- If you die before the age of 75, any money left in your drawdown fund passes tax free to your nominated beneficiary whether they take it as a lump sum or as income. The money must be paid within two years of the provider becoming aware of your death. If the two-year limit is missed, payments will be added to the income of the beneficiary and taxed as normal.
- If you die after the age of 75 and your nominated beneficiary takes the money as income or a lump sum, the money will be added to their other income and taxed as normal.
Is Flexi-access drawdown right for me?
Flexi-access drawdown is a complex product. A regulated financial adviser will be able to recommend whether it’s suitable for you.
If it is, your adviser will compare what’s on the market and find you the most suitable product for your circumstances.
You can find FCA regulated financial advisers who specialise in retirement planning in our Retirement adviser directory.
Your other retirement income options
Flexi-access drawdown is just one of several options you have for using your pension pot to provide a retirement income.
For an overview of all of your options and more on where to get help and advice see our guide Options for using your pension pot or find out more about your options with our Retirement income options tool.
This article is provided by the Money Advice Service.