What is Flexible Drawdown?

I’m approaching retirement and have built up a defined contribution pension pot over my working life. I always assumed I’d just buy an annuity, but the recent pension freedoms seem to have opened up so many more options to provide me with a retirement income that I’m a bit overwhelmed. I’ve heard that thE pension freedoms have brought in something called flexible access drawdown, but what is this and is it right for me?

Question asked by Mr M Burgess

What is Pension Flexi-Access Drawdown?

George Osborne’s pension freedoms — which were introduced in the 2014 Budget and came into force from April 2015 — did indeed shake up pensions market for defined contribution pensions. They freed people from the compulsion to buy an annuity and introduced a number of other options as alternatives, including overhauling the rules surrounding flexible access drawdown. As a result, flexible drawdown was renamed flexi-access drawdown.

Pension drawdown essentially allows you to take your pension pot, or a proportion of it, and put it in a drawdown fund. The drawdown fund is an investment fund that you can draw an income from whenever you need to.

Whereas previously it only tended to be wealthier retirees who could opt for flexible access drawdown — you needed to have a guaranteed retirement income of at least £12,000 per year to be eligible — this barrier has been removed from April 6, 2015.

If you were previously in a flexible drawdown arrangement with your pension provider, this will have automatically been changed to a pension drawdown arrangement.

From April 2015, anyone can take advantage of flexi-access drawdown to make unlimited withdrawals from your pension, providing your pension provider offers a pension drawdown arrangement. Some providers may also still insist on you having a minimum fund size to qualify.

How Does Flexi-Access Drawdown Work?

When you take cash out of your pension, which you usually can’t do before the age of 55, the first 25% is tax-free. If you’re moving into flexi-access drawdown, you put the remainder into a drawdown fund, which you’ll pick based on your income objectives and your attitude to risk.

The cash in the drawdown fund remains invested and you can take sums out as a taxable income at your marginal rate at any time that suits you. Most people choose to take a regular income.

You don’t have to take your entire pension pot in one go to use flexi-access drawdown; you can just take out a chunk and move it into drawdown, leaving the rest invested as before. Although this won’t provide you with an income, there’s a chance for capital growth.

You’re perfectly entitled to have as many drawdown funds as you like. If you prefer, you can use one of your drawdown funds to buy another retirement income product, such as an annuity, which will offer you a guaranteed income.

You can have both an annuity and a drawdown fund simultaneously providing you with income if you wish, although it’s important to consider the tax implications of having various income streams, as you may find yourself in a higher income tax bracket when it’s all added together.

What are the Risks of Flexible Drawdown?

When you use your pension pot to buy annuity, you’re guaranteed an income for the rest of your life, no matter how long you live. With flexible drawdown, the risk is that you might run out of money in the future.

This could happen if you live longer than you expected, take out too much money in the early years or the investment funds you choose don’t perform as well as you hoped.

If you are considering flexi-access drawdown, remember that taking a big taxable lump sum from your pension could push you into a higher tax bracket, so think carefully about how much you take out each time.

It’s highly recommended that you get pensions financial advice before you make any decisions about your retirement income plans. It’s hard to say whether income drawdown is right for you without knowing your individual circumstances, but an adviser will be able to look at your finances and help you decide.

To help address the risk of your pension pot running out too early, Drewberry has built a handy tool. Check out our Income Drawdown Calculator here →

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