Flexi-access drawdown is the means by which – at age 55 or over – you can choose to delay the purchase of an annuity and draw your income directly from pension savings.
Flexi-access drawdown gives you control over how and when you access your benefits. You can decide on how much income you wish to take, if any, and vary the amount at any time, ceasing payments altogether if you wish. Your pension savings will stay invested when you retire, until the time that you choose to withdraw them.
Up to 25% of the accumulated pension fund is available as a tax-free lump sum, this can either be drawn in one go, or in parts – something known as 'phasing'.
Should you decide to phase your pension drawdown, you can choose to take regular monthly or annual payments, or take a series of lump-sum payments as and when you want them. This flexibility allows you to keep your income in line with your needs throughout retirement.
The income drawn that exceeds the tax-free cash allowance is subject to income tax at your highest marginal rate, reflecting the tax relief provided when the benefits were saved. Another key feature of drawdown is that on death, any unused funds can be passed onto a nominated beneficiary, possibly tax-free.
The most suitable course of action is dependent upon individual circumstances and professional advice should be sought. Taxation is subject to change.
A drawdown option means your money stays invested, so it has the potential to go up or down. Your pension fund will most likely need to provide income for the rest of your lifetime, so it’s vital that investments are properly structured to ensure they keep up with inflation and keep their value over time. It’s also extremely important that funds are invested in a way that suits your appetite for risk, and matches the level of capacity you have for losses when investment markets are unstable.
What will happen to my pension when I die?
If you die while your pension is in drawdown, your beneficiaries will have the following options:
- Take the money as a lump sum: A dependent or nominated beneficiary can take your remaining pension fund as a lump sum. This payment will be tax-free if you die before reaching age 75. If you die after the age of 75, it will be taxed at the beneficiary’s marginal rate of income tax
- Continue with drawdown: A dependant or nominated beneficiary can continue to receive your fund as drawdown. The income will be tax-free if you die before reaching age 75, or taxed at the beneficiary's marginal rate of income tax if after
- Convert drawdown fund to a lifetime annuity: A dependant or nominated beneficiary can use your remaining drawdown fund to purchase a lifetime annuity. The income will be tax-free if you die before reaching age 75, or taxed at the beneficiary's marginal rate of income tax if after
Drawdown and its effects are complex. It’s recommended that you seek independent financial advice before considering this option, as the best retirement plan is going to depend on your personal circumstances. If you require any more information on drawdown, or if you’re not sure which pension option is right for you, please contact us to speak to an independent financial adviser.