Flexible drawdown, perhaps ought really be called "uncapped drawdown". It is a way of taking benefits from a pension without buying an annuity, which allows you to take uncapped amounts out your pension.

Key points.

• From age 55 you can enter flexible drawdown, and take tax free cash in the normal way, usually 25%
• You must be able to meet the Mininum Income Requirement; a guaranteed income of £20,000 per year (see below)
• The rest of the fund can then be withdrawn in its entirety or part withdrawals. Please note protected rights cannot be taken this way until April 2012.
• Withdrawals are subject to tax at your highest rate, so it may make sense to make withdrawals over a number of years to manage income tax
• Once in Flexible Drawdown you cannot contribute to a pension or be an active member of a final salary scheme
• For some people Flexible Drawdown could be a very short contract, money in and money out
• Some people might hold it as a long term contract, but with the added flexibility of higher withdrawals when required.

For many people the most that can be withdrawn from a Flexible Drawdown without incurring higher rate tax at 40% will be about £22,000;  you need to prove an income of at least £20,000 and higher rate tax kicks in at about £42,000. So even if you want to strip your pension fund it might make sense to do this over a number of tax years. Remember too there is an effective income tax rate of 60% for income between £100,000 - £130,000, because of the reduction in the personal allowance, and income tax is 50% on income of £150,000.

Minimum Income Requirement (MIR)

• The minimum level of income to qualify for Flexible Drawdown is £20,000.
• The income must be in payment
• The income must be guaranteed
• Other drawdown income does not apply
• Investment linked annuities don't count
• Typically the income will be state pensions, final salary pension and annuities

The advantages of flexible drawdown

• The tax-free lump sum can be taken

• Flexible drawdown allows income to be varied with no maximum

• You don’t have to decide on whether to include spouse’s benefits or other such options with a flexible drawdown contract

• The fund can remain invested so it could grow further

• You can take the entire fund in one go

• Any remaining fund can be passed on in the event of death

There are of course disadvantages to a flexible drawdown plan:

• Any ongoing income/or fund left invested is not guaranteed and could go down

• Withdrawals are subject to tax

• Costs can be high especially for smaller funds

• Where do you invest money withdrawn that is not spent?

Flexible drawdown that is not used to strip out the fund in some ways has many of the downsides Capped Drawdown has. If you don't have a need/want for the money then you need to question your motives for taking it out of the fund.

Capped drawdown - has restrictions on how much income can be withdrawn

Flexible drawdown - no restrictions on how much can be withdrawn, but only available if you have guaranteed income of £20,000 per year

If you have a question about pension drawdown or want to discuss Flexible or Capped drawdown in more detail and how it can benefit you then contact us online or phone 0800 011 2713.

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