For those who may be approaching retirement, a quick internet search may have thrown out the idea of “Flexi-Access Drawdown”. You may have heard this term used in relation to your pension provisions and you may be wondering how it works and if it is right for you.

What is Flexi-Access Drawdown?

From April 2015, rules on how you can take your pension benefits were changed to allow everyone more flexibility over how and when you take your income in retirement.

For most modern day Defined Contribution plans, Flexi-Access Drawdown means there are no limits on the amount of withdrawals that can be taken from your pension. Although, older plans and many workplace schemes still have a more limited choice of options at retirement available therefore a full pension review with one of our dedicated Independent Financial Advisers will be necessary to give further clarity over which options are available to you within your specific pension plans.

Tax Free Cash (Pension Commencement Lump Sum)

From age 55 (57 from 2028) you are entitled to withdraw up to 25% of your fund value with no tax to pay regardless of your current marginal rate of tax. This can be highly advantageous for tax payers as it provides tax free income which can be used however is needed. The tax free cash can be paid alone, or you can have 25% of each income payment tax free which is a variation on flexi-access drawdown. The topic of Tax Free Cash was discussed in detail in last week’s article.

Taxable Income

Income in excess of the 25% PCLS will be taxed at your marginal rate of income tax. As mentioned above, there is no limit to the amount of withdrawals that can be made from your Flexi-Access Drawdown although it is imperative to remember that if more income is taken than the amount of growth received on the funds there will be a greater risk of depleting the funds entirely and running out of income.

Money Purchase Annual Allowance

Once income in excess of the 25% PCLS (tax free cash) is taken, the Money Purchase Annual Allowance (MPAA) will be triggered. This means that the maximum you can save into a pension and receive tax relief will be reduced from £40,000 per year for most individuals to £4,000 per year. This must be considered before any ‘taxable’ withdrawals are made. Our advisers would be able to explain this in detail at your pension review meeting.

Our advisers are able to put together an overall income strategy for your retirement in order to ensure that you receive the correct level income in the most tax efficient manner whilst preserving the value of your pension funds wherever possible. We are also able to provide you with a cash flow report that can show you, in monetary terms, the effect of your income withdrawals on your overall pension funds which many of our client’s have found useful.

If you wish to explore your options in retirement please feel free to get in touch. Our local, friendly team of Independent Financial Advisers will be happy to provide advice and suitable recommendations tailored specifically for you.

Give us a call on 01788 571122 and we will be more than happy to help.

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. It does not constitute advice. All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor. 

PJL Financial Services Limited are authorised and regulated by the Financial Conduct Authority. 

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