What is an Income Drawdown Pension?

An income drawdown pension is a way of accessing your retirement savings while your money remains invested and accessible. You can arrange your income to suit you, access tax-free cash when convenient and take advantage of valuable benefits for your dependents if you die.
 
Because your money remains invested you can continue to benefit from long-term investment growth. We recommend regular reviews to make sure your income drawdown plan continues to suit your needs.

Income Drawdown

An Income Drawdown plan allows you to benefit from flexible access to your money. You can withdraw money from your plan when and how you want, and you can even draw tax-free cash from your plan as long as you have uncrystallised funds in your account. With the right plan, you can minimise or possibly even eliminate income tax altogether.

Unlike an annuity, assets held within a pension drawdown are not guaranteed and you may get back less than you invested.

On the other hand, keeping your pension savings invested means you can benefit from a wide-range of investment options to suit any risk appetite. Long-term investments remain the best option to beat inflation.
 
You still have the option to purchase an annuity with some or all of your plan at any time.

Flexi-Access Pension Drawdown Rules

Flexi-Access Drawdown plans were introduced in April 2015. There are no limits on the income you can draw from your plan at any one time, and you do not need to prove you have a guaranteed income in place.

Any money you withdraw from a flexi-access drawdown can be in the form of income, tax-free cash, or both.

To withdraw money you first have to crystallise the funds. You can take 25% of the crystallised amount as a tax-free cash payment, called a Pension Commencement Lump Sum, or PCLS. You can draw the remaining 75% as taxable income (subject to your marginal rate), or leave it in the account to access in the future.

With careful planning and patience, a flexi-access drawdown pension can drastically reduce the amount of tax you might otherwise have to pay.

The first income payment from your plan may be paid under an emergency tax code, which means you might pay more tax than necessary. Any overpaid tax will be corrected through your personal tax account in time, or you can complete a form to refund the tax. Exactly which form you need will depend on your circumstances, so speak to one of our advisers for more information.

If you draw any taxable income, even £1 (i.e. not the PCLS), you will trigger the Money Purchase Annual Allowance (MPAA), which limits how much you can contribute to a personal pension. The MPAA limit for the 2023/24 tax year is £4,000.

In the event of death, the remaining benefits in the drawdown plan may be taxed differently depending on if they are crystallised or uncrystallised, or if you are younger or older than 75.

Flexi-Access Drawdown plans provide some of the most flexible pension benefits available, but it’s important to get professional advice to ensure you are not caught out by some of the quirks of this product. 

Flexible Pension Drawdown Rules

Flexible Drawdown plans were introduced in April 2011, and were replaced by Flexi-Access Drawdown plans in April 2015.

Flexible Drawdown plans removed the limits imposed by traditional Capped Drawdowns, but they were only available to people who could prove they were receiving a minimum guaranteed income of £12,000 before tax.

The minimum income requirement was to ensure clients would not access and squander all their pension savings, and have no income to rely on.

In practice, this limited flexible drawdown to very wealthy clients who had enough money to secure an annuity of £12,000 annually, and still need flexible access to their rest of their funds.

Flexible Drawdown plans are no longer available.

Capped Pension Drawdown Rules

Capped Drawdown plans were first introduced in 1995 in response to falling annuity rates. They were intended to allow people to access income from their pensions without having to buy an annuity.

The income available from a Capped Drawdown plan was limited by the Government Actuarial Department. GAD limits imposed minimum and maximum drawdown rates each year.

Rates were reviewed periodically, taking into account the remaining pension fund and annuity rates, to ensure income could be maintained without the plan running out of money.

Capped Drawdown plans are no longer available.

Why use BBi Financial Planning?

Chartered

Our advisers have obtained the highest level of qualification in UK financial services

Experienced

With decades of experience between them our advisers have seen it all.

Technology

We use the best tools available to make sure our research is as good as it gets.

Compliant

We invest heavily in expert compliance support to ensure our staff and processes are always under scruitiny.

Connected

We have relationships with tax and legal experts to provide you with a holistic support network.

Available

A service agreement with us means you will be able to speak to your chartered adviser. You won’t be stranded with someone else.

Benefits of an Income Drawdown plan

The benefit clients value most is the flexibility of income and the ability to access the fund. This is not possible with an annuity.
 
Income can be adjusted month to month, with ad hoc payments available as you wish. It’s flexible to take the tax-free cash too, so with careful planning it’s possible to pay no income tax at all, but this will depend on your personal circumstances.
 
Taking benefits from your plan does not prevent you saving into a pension either, although if you have taken income (as opposed to tax-free cash only) from your plan, the amount you can save to a pension drops to £4,000 per year.

Why choose BBi Financial Planning for income protection insurance?

Independent Advisers

We are proud of our independence.
It means no-one tells us what to do but you.
You can trust us to put your needs and goals first.

Chartered Professionals

We are a chartered firm and our advisers hold chartered status.
This puts us in the small elite number of firms in the UK, and means we uphold the highest standards.

Bespoke Cover

Our advisers will take the time to understand exactly what you need protected and why, and advise you on the most suitable options for your budget.

Is Income Drawdown right for you?

Flexible income

With an income drawdown plan you can take as much income as you like, as often as you like, until the funds run out.

Managing this is important to make sure you have enough to live on, and that you don’t pay more tax than you have to.

Access capital on death

If you die with money remaining in your plan, this can be passed on to someone else.

They can use this to continue drawing income, or save the money for their own retirement.

Remain invested

As healthcare and quality of life increases, people are living longer, which means you could still benefit from decades of growth after you retire.

Beat inflation

The longer the investment term, the better the potential returns.
 
Long-term investing is the most reliable way to beat the eroding effects of inflation.

What are the benefits of Income Drawdown?

Income drawdown policies provide the dual benefits of flexibility of income with the potential for further investment growth, but unlike annuities, the income is not guaranteed and will depend on investment returns and the rate of withdrawal.

Flexible income

Take income when it suits you

You don’t need to take an income if you don’t need to. Should you want to, you can set up regular income, take one-off payments, or even take it all out at once.

Just be sure you know how much tax you will pay, and what you will do for income once the money is gone.

Invest for the rest of your life

Extra-long term investing

Money in drawdown can stay invested if you want, just like your pension was when you were saving. Because you can leave this money invested even in drawdown, it can continue to grow for decades after you started your first pension.

Make sure you manage it carefully because returns are not guaranteed.

Phased drawdown

Manage your tax-free cash

Phased drawdown is a process which allows you to stagger your retirement benefits, combining tax-free cash and income (if you need income) in smaller increments.

This allows more flexibility in your financial planning.

Contact Details

BBi Financial Planning

The Old Court House

191 High Road

South Woodford

London

E18 2QF

Tel: 020 8559 2111

Email: enquiries@bbifp.com

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