Drawdown and Flexi-access Drawdown Pensions

Drawdown and Flexi-access Drawdown Pensions

Deciding to set up a pension is an important step in planning for retirement. But what type of pension will suit your circumstances best, and how will you access your money when the time is right? Here, we explore Drawdown Pensions..

What is a Drawdown or Flexi-access drawdown pension?

You can contribute to a pension anytime however once you reach the age of 55, you can start accessing your pension fund. There are a few options open to you at this point, one of which is ‘Drawdown’.

Here, you convert your pension savings to a Drawdown Pension, which keeps your money invested for longer. The other main options are to withdraw your pension funds as cash or use them to buy an annuity, which pays you a guaranteed income for life.

Drawdown is a popular option for people who want to keep their money invested to potentially keep growing.

What are the rules of a Drawdown Pension?

With a Drawdown Pension, you can withdraw up to 25% of your pension savings as a tax-free lump sum.

How you take income from the remaining fund is up to you. The options are:

• To take regular monthly or annual payments
• To take a series of lump-sum payments
• To withdraw the whole amount in one go

If you set up a Drawdown Pension before April 2015, there were two types: Capped Drawdown, which was limited by the Government; and Flexible Drawdown where you can take as much money as you wish each year.

With a Capped Drawdown pension, the maximum income is 150% of the total you would have received each year had you bought an annuity. Since 2015, Flexi-access Drawdown Pensions are the only type available.

All Flexible Drawdown plans automatically converted to Flexi-access Drawdown in 2015. If you’re in a Capped Drawdown arrangement you can convert to Flexi-access Drawdown, or keep your current plan.

Is a Drawdown Pension right for me?

There are some risks with a Drawdown Pension – firstly that investments can go down as well as up, secondly, they do not give you a guaranteed income for life. You need to carefully manage how you withdraw from the fund so that you don’t run out of money.

How much tax will I pay?

After the initial 25% tax-free element of your pension, you pay income tax on further withdrawals. The level of tax you pay depends on how much money you take out in a year.

At 2021 / 2022 rates, this means:

• The first £12,570 is tax-free
• You’ll pay 20% tax up to £37,700
• You’ll pay 40% tax from £50,270 (£12,570 + £37,700)
• You’ll pay 45% tax above £150,000

What happens to my Drawdown Pension plan when I die?

If you die under the age of 75, your next of kin will inherit the whole fund tax-free. They can take the fund as regular income from your Drawdown plan, or as a lump sum.

If you die over the age of 75, your beneficiaries pay tax at their normal rate of income tax, whether they take a lump sum or an income.

You can choose anyone to be the beneficiary of your pension fund, not just a spouse or child. You need to make this clear to your pension provider via a nomination form.

Can I still save into a pension if I open a Drawdown Pension plan?

With most pensions, once you’ve taken your 25% lump sum, you can still contribute up to £60,000 or the maximum you earn, whichever is lower. £60,000 is the Pension Annual Allowance. But with a Drawdown plan, once you take your 25% tax-free lump sum you are limited to £10,000 in payments into the fund.

How can CT Wealth Management help me?

Deciding how to plan for your retirement income is very important, and you should seek financial advice to explore the options for your specific situation.

We are a team of financial advisers who have years of experience in helping people decide how best to achieve their personal goals for retirement. We will talk through your investment options, explain how the various pension products like Drawdown work, and help you decide when and how to access your tax-free cash allowance.

Once you are nearing retirement, we will explore the options again, pension-wise, and the latest rules around tax relief. Get in touch today for a no obligation consultation.

The value of investments and any income from them can fall as well as rise. You may not get back the amount originally invested.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.