If you are approaching retirement, you will no doubt be busy considering what your options are in relation to your pension. Do you leave your pension where it is, do you buy an annuity giving you an income for life or do you look at income drawdown to keep you going through your retirement?
It’s the latter concept that is relatively new to the Pensions Market, having been introduced in the Budget of 2014 and so here we explain what exactly income drawdown is.
Quite simply, income drawdown is where you leave the money that has accrued in your pension pot where it is, and then take an income directly from it, as opposed to taking all the cash out and using it to purchase the aforesaid annuity from an insurance company. The money that remains in your pension will remain invested in whatever fund it sits, meaning that you will continue to benefit from any future investment growth that is seen.
Under the jargon that the Pensions Industry so loves, these new arrangements are known as ‘flexi-access’ and can be taken by anyone who has reached the age of 55 or above and has a private pension plan. Under the ‘flexi-access’ rules you can take out as much or as little as you wish each year from your pension pot.
If you decide that the flexi-access approach is for you, then you can, in most circumstances, take out 25% of the funds in your pension as a tax free lump sum at the outset (you may be able to take more if you have a protected lump sum – check with your pension provider). However, under this type of approach, if you do not take your tax free lump sum at the outset then you will lose the opportunity to do this at a later date.
However, you do not need to take more – you can just take the 25% tax free lump sum at the outset and then drawdown the remainder of the funds at sometime in the future to suit yourself. However, be aware that all future withdrawals will then be subject to tax at your marginal rate.
Uncrystallised Fund Pension Lump Sum
This is another option that the 2014 budget introduced; should you choose this option then you cannot take the 25% lump sum up front, but instead each time you drawdown a payment from your fund, 25% of it will be tax free, and the remaining 75% will be subject to tax at your marginal rate.
Not all pension providers will allow flexi-access drawdown. If yours does not offer this option then you would need to determine whether you would be able to transfer your benefits to another provider who does offer this option. This is a complex decision to take as it will almost certainly involve fees, which could be quite substantial, and may also result in a reduction in benefits: therefore you should not take this kind of decision alone. If you are considering this, it is essential that you take independent financial advice from a fully qualified pensions adviser. To help you find one in your area visit the Financial Conduct Authority website at www.fca.org.uk