How have the new ‘pension freedoms’ changed income drawdown?

I try and keep up with the latest developments but I’m confused about how the new ‘pension freedoms’ will affect my income drawdown arrangements now that I’ve started to take an income.

Question asked by Edwina Mayfleld
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Answered by Stephen Moore

 

Income Drawdown Just Got ‘Flexi’

Since the arrival in April of 2015 of the pension freedomsall new income drawdown contracts are what’s called ‘flexi-access drawdown’ arrangements. Prior to this, income drawdown came in two distinct flavours:‘flexible’ and ‘capped’.

Anyone who had a flexible drawdown arrangement in place prior to April 2015 will have been automatically transferred to the new ‘flexi-access’ drawdown regime. This means that you can immediately take advantage of the added investment flexibility that comes with the new regime.

Keeping the cap on

If you were previously in a more constrained ‘capped’ drawdown arrangement, you can now either convert to flexi-access drawdown or choose to remain in your current arrangement which caps your income to the Government Actuary Department’s (GAD) limits.

This may be well suited to your needs as the limits ensure a conservative income profile which greatly reduces the risk that your pension pot will run dry in retirement. It also means that you can continue to contribute up to £40,000 a year to your drawdown plan, even though you’ve already started to take benefits.

Keep in mind that, if you choose to draw down more than the GAD prescribed limit, your plan will automatically become classed as a flexi-access contract which means that, under the new money purchase annual allowance (MPAA) rules, you’ll only be entitled to contribute a further £4,000 a year to your pension.

Now there’s no cap on how much you can draw down from your pension it’s important you don’t take too much – use our Pension Drawdown Calculator to check how long your pension should last.

New tricks: improved access

Among other things, flexi-access drawdown allows you to take up to 25% of your pension pot as a tax-free lump sum; cash it in entirely with the first 25% tax free; leave it invested until you need it; draw a regular taxable income and contribute up to £4,000 a year to your existing pension plan – even after you’ve started to draw the benefits.

Coming to terms: the rise of the ‘FLUMPs’…

The pension freedoms also introduced a second kind of drawdown that focuses on lump sums. Those savers who might still have uncrystallised pension funds i.e. funds that aren’t already in drawdown, can take an uncrystallised funds pension lump sum (UFPLS) or a ‘FLUMP’ as it’s becoming known. This approach allows you to deplete your fund in one go or in a series of payments each of which will be 25% tax free, with the remainder subject to income tax at your marginal rate.

flexi-access drawdown
 
new pension freedoms
 
new income drawdown rules
 
tax-free lump sums (UFPLS)
 
This information does not constitute financial or other professional advice. You should consult your professional adviser or contact us directly on 02084327333 should you require financial advice. It is important to ensure any insurance policy you take out is suitable for your needs.
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