What is income drawdown?

A friend told me I should think about ‘income drawdown’ now that I’m in my late 50s. I thought my company pensions would take care of me and my wife when I come to retire. What is income drawdown and how can I tell if it’s right for me?

Question asked by Mr G H Kahn
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Answered by Stephen Moore

Income drawdown has been around for a long time…

Income drawdown isn’t new. It was introduced in its earliest form in 1995. Having been given an overhaul with the new pension freedoms in April 2015, income drawdown lets you take control of your pension pot by keeping it invested in the markets and creating your own programme of lump sum withdrawals and income payments.

Pension drawdown provides a means to pass on your pension wealth to your chosen beneficiaries in a tax efficient way and, thanks to its flexibility, income drawdown can also create opportunities to reduce your tax bill in retirement.

Making the most of pension freedom

The latest incarnation of income drawdown is called flexi-access drawdown. It replaces the two previous types of contract known as ‘flexible’ and ‘capped’ drawdown. It was introduced as part of the sweeping new ‘pension freedoms’ that came into force in April of 2015.

For many people with generous final salary scheme benefits, the additional freedoms available and the abolition of the former 55% death tax were a tipping point. There’s already been a noticeable increase in the number of pension transfers and enquiries as a result.

There are now a combination of factors that are prompting pension savers to investigate a transfer of their final salary benefits. The first is the increased flexibility that’s been conferred by the new regime.

The second is probably the tantalising transfer values that are often now in evidence from final salary company pension schemes. The third is that a transfer can transform your hard-earned final salary benefits into a significant financial asset and let your beneficiaries inherit your pension should you pass away.

Once you have your pension pot in the defined benefit regime – in a personal, stakeholder or self-invested personal pension (SIPP) – you can use the new income drawdown rules to do any of the following things:

  • Take up to a quarter of your pension pot as an immediate, tax-free lump sum (or more if you have a protected lump sum) and invest the rest to provide an income either now or in the future
  • Take all of your pension pot in cash. The first 25% will be tax free and the rest subject to your marginal rate of income tax
  • Take a series of ad hoc lump sums whenever they might be needed. Each of these will be 25% tax free with the rest subject to your marginal rate of income tax. This ‘alternative’ drawdown route is known as an uncrystallised funds pension lump sum or a UFPLS. More colloquially, it’s also been referred to as a ‘FLUMP’
  • Leave all your pension pot invested until you need it
  • Draw down a regular, taxable income 
  • Begin drawing benefits from any age after 55 (or earlier in the case of ill health)
  • Still save up to £4,000 pa into your pension plan (even after you’ve started to draw the benefits).
flex-access drawdown
 
income drawdown
 
new pension freedoms
 
retirement planning
 
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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