Drawdown and Flexi-Access Drawdown Pensions
Drawdown and Flexi Access Drawdown Pensions
Leo Alexander shares their expertise on drawdown and flexi-access drawdown pensions.
Table of Contents
What is a drawdown pension and a flexi-access drawdown pension?
There are two types of drawdown pension. There’s capped drawdown, which is the old style of drawdown where the amount that you can take each year from your pension is limited by the government actuary’s department (GAD).
Flexi-access drawdown is different. It was introduced as part of the 2015 pension freedoms and is now the most common type of drawdown. Here, there are no limits on how much you can take each year.
What are the benefits of flexi-access drawdown pensions?
It’s a flexible way of taking money from your pension. You can take ad-hoc lump sums or you set up a regular income – but you are free to alter, suspend and restart these regular payments as necessary to suit your needs.
Flexi-access may not be suitable for everyone, as there’s a risk of overspending your pension, but we can advise you on what is most suitable for your circumstances and objectives – and these will obviously change over time.
When is it a good idea to have a flexi-access drawdown pension?
Flexi-access drawdown pensions are best for people who want full flexibility with how they take the money from their pension. It’s good for those who don’t wish to have a fixed income that you would get, for example, through purchasing an annuity.
What other ways can you take your pension?
Depending on the pension scheme that you’re part of, you may have a range of options. These include taking the pension as a single lump sum, or as we just mentioned, purchasing an annuity from an insurance company. Annuities provide a fixed income for life.
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How much tax will I pay?
It varies depending on your circumstances. Most pensions have a 25% tax-free entitlement. The remainder that isn’t tax-free is taxed at your marginal rate of income tax, usually deducted through the PAYE system.
What will happen to my pension when I die?
It’s not a nice question to talk about, but it’s important to understand. Many pension schemes ask you to complete a death benefit nomination form, sometimes called an expression of wish form.
This informs the scheme trustees of who you wish your pension to be passed to when you die. You can change your nominations at any time and obviously it’s important to keep this up to date.
Are there any disadvantages to a flexi-access drawdown pension?
Yes. Although flexibility is great, there are some disadvantages which mean flexi-access isn’t right for everyone. Flexibly accessing your pension triggers the Money Purchase Annual Allowance (the MPAA) which limits the pension contributions you can make to £4,000 a year. Also, as mentioned before, some people do wish to have a fixed income for life so that they’re sure what they will receive from their pension.
Here at Leo Alexander we deal with these types of pensions all the time. So if you would like any further advice and help, please do give us a call and we’ll take it from there.