Answered by Stephen Moore
Income Drawdown Just Got ‘Flexi’
Since the arrival in April of 2015 of the pension freedoms, all 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.
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