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 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 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.
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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.
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.
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.
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.
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.
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.