If you want to take pension benefits without buying an annuity, then you may want to consider flexi-access drawdown. This is one of the new methods of taking pension benefits introduced in April 2015. In many ways it is like previous options of drawdown but with unlimited withdrawals.
In our view there will be five main uses/methods for flexi-access drawdown, once the tax-free lump sum has been taken:
- Taking tax-free cash and no taxable withdrawals
- To allow you to strip out the fund, but reduce income tax
- Use like a bank account and make occasional withdrawals
- To aim to provide a long term income
- To leave the money invested to pass on, inheritance tax free
- It would normally allow 25% of the fund as a tax-free lump sum
- The remaining 75% can then be withdrawn immediately or over a number of tax years. This element would be taxable
- No taxable income has to be withdrawn at all
- You can normally start to take benefits from age 55
- If you cannot work due to ill health, and this is permanent, then you can take a pension before age 55
- There is no upper age limit
- In the event of death, the remaining fund can be be used by a dependent to continue to make withdrawals, or buy an annuity. It can also be paid out as cash in the event of death, tax free, if death occurs before age 75. If death occurs after age 75, the income tax becomes the liability of the beneficiaries.
The advantages of flexi-access drawdown
- The tax-free lump sum can be taken
- Withdrawal levels can be varied
- Flexi-access drawdown permits you to just take the lump sum only
- Flexi-access drawdown avoids buying an annuity
- You don’t have to decide on whether to include spouse’s benefits or other such options with a flexi-access drawdown contract
- The fund can remain invested - so it could grow further
- The fund can be invested in various ways, from low risk to high risk
- The fund can be passed on, in the event of death
There are, of course, disadvantages of flexi-access drawdown:
- Annuity rates could go down, if you later decide you want to buy an annuity with your remaining funds
- The flexi-access drawdown contract could fall in value
- The ongoing income is not guaranteed and could go down
- Flexi-access drawdown requires ongoing monitoring of the plan
- Charges could be higher for drawdown than annuity purchase
- You could end up with no money left in this contract, if you withdraw too much and/or investment returns are poor
- If you take a taxable withdrawal, you will not be able to pay more than £10,000 per year into a defined contribution pension
The main disadvantage is that the value of the fund may be eroded, especially if investment returns are poor and a high level of income is taken; this could result in you having no money left for the future.
If you have a question about flexi-access or want to discuss your pension in more detail and how it can benefit you, then contact us online or phone 0800 011 2713.
If you can't find the information you're looking for on the website, or you want to know more or have a question, or just want to chat through some details about your pension then please feel free to contact us, without obligation. Either contact us online or call 0800 011 2713.