Managing your retirement funds can often feel like navigating uncharted waters. Flexi-access drawdown is a retirement tool designed to give you the control and flexibility to access your pension savings when and how you need them. It’s become an increasingly popular choice for retirees looking to maintain some investment growth potential while drawing down income.
This guide dives into everything you need to know about flexi-access drawdown, including how it works, its benefits and drawbacks, and the rules governing its use. If you’re considering using flexi-access drawdown to manage your retirement savings, this guide will arm you with the essential knowledge to make informed decisions.
What is Flexi Access Drawdown?
Flexi-access drawdown is a pension product that allows you to access your retirement savings whenever you need them while keeping the rest of your funds invested. This means you have the opportunity to benefit from continued growth of your savings, even as you withdraw income from them.
With flexi-access drawdown, you can usually withdraw up to 25% of your pension pot as a tax-free lump sum. The remaining funds stay invested in a drawdown plan, and you’re free to take taxable withdrawals from the rest at your discretion.
Introduced in April 2015 as part of broader pension reforms, flexi-access drawdown replaced older “capped” and “flexible drawdown” arrangements, making pension drawdown more accessible to a wider range of people. From your 55th birthday onwards, you can unlock cash from your pension using flexi-access drawdown.
Key Features of Flexi-Access Drawdown
- Take up to 25% of your savings as a tax-free cash lump sum.
- Keep remaining funds invested for potential growth.
- Withdraw as much or as little income as needed.
- Any money withdrawn after the tax-free limit will be taxed as income.
- Provides greater control over when and how much you withdraw.
How Does Flexi Access Drawdown Work?
When you access your pension savings, you’ll normally be entitled to up to 25% of your pension pot as a tax-free cash lump sum, subject to a lifetime limit of £268,275 (unless you hold protections for a higher allowance). For every £1 of tax-free cash withdrawn, £3 is moved into your drawdown account for future taxable withdrawals.
Funds remaining in your drawdown plan stay invested, meaning their value can rise or fall depending on market performance. However, withdrawals you take from the remaining pot count as taxable income.
Here’s the process broken down step-by-step:
Take Your Tax-Free Lump Sum
Withdraw up to 25% of your pension pot without paying any tax.
Set Up Your Drawdown Account
The remaining funds are moved into a flexi-access drawdown account, where they are reinvested.
Flexible Withdrawals
Access the funds in your drawdown account whenever you’d like. Withdrawals over the tax-free allowance are subject to income tax.
Trigger the MPAA
Once you take any income payments, your annual pension contribution limit may drop from £60,000 to £10,000.
It’s important to carefully manage how much you withdraw from your flexi-access drawdown account. Taking too much too early could leave you without money to live on in later years.
Benefits of Flexi Access Drawdown
Flexi-access drawdown puts you in the driver’s seat of your retirement income. Here are some of the top benefits it offers:
01
Tax-Free Lump Sum
You can withdraw up to 25% of your pension pot without paying tax, giving you a financial boost when you need it most. This lump sum can be used to supplement income, pay off debts, help family members, or fund that dream retirement trip.
02
Potential for Investment Growth
Unlike an annuity, which provides a fixed income, flexi-access drawdown keeps the remainder of your pension invested. This offers the potential for growth, although investment performance is not guaranteed.
03
Flexibility in Income
Withdraw the amount you need, when you need it, whether it’s regular payments or ad hoc lump sums. Adjust your withdrawals to suit your lifestyle or account for market changes.
04
Legacy Planning
Unused funds can be passed on. Nominate a beneficiary—whether it’s a family member, friend, or charity—to inherit your remaining drawdown funds if you pass away.
The Drawbacks of Flexi Access Drawdown
While flexi-access drawdown offers flexibility, it’s not without risks.
Here’s what to be aware of before choosing this option:
01
Investment Risk
The value of investments can fluctuate, so there’s no guarantee your pension pot will grow. Poor market performance could leave you with less than expected.
02
Risk of Running Out of Money
Withdrawals reduce your remaining pension pot. If you withdraw too much too soon, you risk depleting your savings in retirement.
03
Tax Implications
Any withdrawals over the 25% tax-free limit are treated as income and taxed accordingly. Large lump sum withdrawals could push you into a higher tax band.
04
MPAA Restrictions
Taking taxable income triggers the Money Purchase Annual Allowance (MPAA), reducing your annual pension contribution allowance from £60,000 to £10,000.
05
Complexity of Management
Managing investments and withdrawal rates requires careful planning and potentially professional advice.
Important Rules of Flexi Access Drawdown
To make the most of flexi-access drawdown, it’s important to understand the rules that apply.
- Tax-Free Limit: You can take up to 25% of your pension pot as a tax-free lump sum. Beyond this, withdrawals are taxed as income.
- Income Tax Thresholds: Large withdrawals can push you into a higher tax bracket, so plan withdrawals carefully.
- MPAA: Taking taxable withdrawals triggers a reduced contribution cap of £10,000 per year, which limits your ability to build up further pension savings.
- Annuity Option: You can use your remaining drawdown funds to purchase a guaranteed income (annuity) at any time.
Flexi Access Drawdown vs Flexible Drawdown
Flexi-access drawdown replaced flexible drawdown in April 2015. Unlike flexible drawdown, it doesn’t require a minimum guaranteed income from other sources, making it accessible to more people.
Is Flexi Access Drawdown Right for You?
Flexi-access drawdown could be a great option if you value flexibility and the opportunity for investment growth in retirement. However, it’s not without risks. To make the best decision for your circumstances, you may want to consult a financial adviser who can provide tailored advice based on your situation.