There’s really no disputing the fact that making sense of the endless differentplans and options available these days can be difficult. An increasingly popular option is that of the Flexi-Access Drawdown, but what exactly does the term refer to and how does it work?
The Flexi-Access Pension Drawdown – What is it?
In the simplest of terms, Flexi-Access Pension Drawdown arrangements allow the pension holder to access and manage their pension funds and benefits in a specific set of ways:
- 25% Tax-Free Lump Sum – For example, up to 25% of the total pension pot can be accessed tax-free, meaning that however much is withdrawn as a lump sum, the first 25% will not be subject to income taxation. It is not necessary to begin taking the remaining benefits as income if you do not want to.
In a working example, a father is looking to give his daughter a hand paying her university bills and is considering taking the full 25% tax-free allowance from his pension pot. He’d then like to keep the rest of the money safely to one side and unused, in order to continue benefiting from itsand to access as little or as much as he likes, when and where necessary.
His pension pot totals £80,000, which means that he’s entitled to £20,000 tax-free. This leaves him with £60,000 in his Flexible Drawdown, which he will be able to access in full or in part at any time, though will be liable to pay tax on any funds accessed as he already used his full 25% tax-free allowance.
- Leave the Funds Invested – As much or as little of the total pot can be left as it is to continue benefiting (or suffering!) in accordance with how things perform over time. There’s every chance the funds could grow, but with investments there is always the chance of sustaining losses – a risk that cannot be avoided. It’s crucial to think about how much risk you are willing to take and can indeed afford to take – seek independent advice if unsure.
- Overspend and Exhaust All Funds – As there is no limit to how much of the total pot can be accessed or how frequently the funds can be tapped into, it is the responsibility of the policy holder to ensure they do not run out of money at a crucial juncture. Various fees, charges and income tax must be taken into account in order to avoid running into trouble – careful planning and independent financial advice are both of critical importance.
- Pension Allowances Are Reduced – It’s important to be aware of the fact that just as soon as a Flexi-Access Pension Drawdown plan is brought into use, your Money Purchase Annual Allowance – aka how much you can put into your pension each year – drops to £10,000 per year from £40,000 per year.
- Leave the Funds to Others Upon Your Death – Any or all of the remaining funds in the pension can be passed onto the person or persons of your choosing when you die, in accordance with various legislative rules and taxation standards.
If you are under the age of 75 when you die, your partner or beneficiary has the option of taking what’s left as a lump-sum cash payment, remaining in the plan as it exists in order to take regular income tax-free or to buy an annuity, which will again be paid out tax-free.
If you are over the age of 75 when you die, your partner or beneficiary can keep to the plan as it stands and pay tax at their standard rate, access the funds as a lump sum with a taxation rate of 45% or buy an annuity to receive income taxed at their standard rate.
Access to Flexible Drawdown plans is to some extent restricted – those with defined benefit/final salary schemes will not be able to enter Flexible Drawdown unless they were to transfer out of their current scheme. It’s also important to note that not all providers offer the Flexible Drawdown option at all, so there are instances where those wishing to join up may be required to transfer to a different provider entirely.
All drawdown plans following the pension reforms of April this year will automatically be flexi-access drawdown, with the exception of the capped drawdown arrangement. Unlike so many pension plans and options, a Flexi-Access Pension Drawdown doesn’t necessarily have to constitute a commitment for life, so there is some flexibility in there. Nevertheless, mistakes with regard to buying into and transferring out of such plans can be as costly and risky as it can be rewarding – seek help and advice from an independent financial advisor before going ahead.