Introduced a couple of years ago, Flexible Drawdown has given an additional option to would-be retirees, who want to convert their pension pot into an income.
Essentially, Flexible Drawdown was designed to allow those people who qualify, greater access to their pension fund; in fact, unlike other options, it allows unlimited access.
Flexible Drawdown rules
Flexible Drawdown works in a very similar way to Income Drawdown, which is also now known as Capped Drawdown; it is available from age 55, you can take up to 25% of the fund as a tax free lump sum and your capital remains invested whilst you take the required level of income.
However, there is one key difference. Income Drawdown investors have a cap on the maximum income which can be taken each year, no such cap exists for people using Flexible Drawdown. Providing you qualify, more of which in a moment, you can drawdown as much or as little as you like each year, even taking the whole fund as a lump sum if you wish.
With the exception of the 25% tax free lump sum, you will of course pay Income Tax on any money you take using Flexible Drawdown and taking large amounts of income could push you into a higher tax band, so careful planning is needed.
Because Flexible Drawdown could allow you to take all the money from your pension fund, you have to meet the Minimum Income Requirement, or MIR for short, to qualify. To meet the MIR you have to have guaranteed lifetime income of at least £20,000 before tax and this must be in payment in the tax year in which you enter Flexible Drawdown. You only have to pass the test once, by being in receipt of income of at least £20,000 in the year you opt to use Flexible Drawdown, however the sources of income which qualify for the MIR are limited to:
- State Pension
- Annuity income (not including a Purchased Life Annuity)
- Pensions from a defined benefit or final salary scheme (subject to conditions)
There are other Flexible Drawdown rules , which are covered here.
Only a small proportion of would-be retirees will be able to take advantage of the Flexible Drawdown rules, however if you plan to do so in the next tax year, then you should start planning now.
1. Make your final pension contribution before the end of the tax year
Once you have started to use Flexible Drawdown, any pension contributions in later tax years will be subject to tax charges. What’s more, you can’t go into Flexible Drawdown in a tax year where you have made a pension contribution.
Therefore, if you plan to use Flexible Drawdown in the 2013/14 tax year, starting on 6th April 2013, you need to have made your final pension contributions over the next four weeks or so.
If you plan to make a payment before the end of the tax-year, remember that pension contributions are limited to £50,000 or 100% of your relevant UK earnings, whichever is lower. You can potentially increase the amount you can pay in by using the Carry Forward rules or altering your Pension Input Period; there are complex rules surrounding these options, if you wish to pay more than £50,000 in as a lump sum you should speak to one of our team of advisers, who can talk you through your options.
2. Review your existing pension provider
Not every pension provider offers Flexible Drawdown, you should therefore check whether yours does and if they do, what the additional costs are.
In our experience most people who use Flexible Drawdown do so via a SIPP (Self-Invested Personal Pension). There are a number of reasons for this; firstly, many Personal Pension providers don’t offer Flexible Drawdown. Secondly, most SIPPs charge fixed annual fees, rather than percentages, which can be cheaper for larger funds. Finally, most people we see who use Flexible Drawdown plan to completely empty their pension fund over a relatively short period of time, say five to 10 years, they therefore want to use low risk investments, often including deposit accounts, which can be held in a SIPP.
Of course there are fees for using Flexible Drawdown and you need to bear this in mind, both when you are considering the merits of this option and the provider you will use.
You can see a list of SIPPs who offer Flexible Drawdown by clicking here.
3. Review your investment strategy
As we’ve just said, in our experience most people who use Flexible Drawdown wish to avoid exposing their capital to significant risk.
Whilst you have been building up your pension fund, investing in stocks and shares might have been the right thing to do, after all it was probably a long term investment. However, for the majority of people, who plan to empty their Flexible Drawdown fund over a relatively short period of time, less risky investments might be preferable.
If you are thinking of moving to Flexible Drawdown spend some time planning how you will draw income and then review your investment strategy, changing it if necessary.
Next steps
If you are considering using Flexible Drawdown in the next tax-year, you urgently need to start planning; the 6th April is only four weeks away.
Of course that doesn’t mean you should rush and make hasty decisions. Firstly you need to make sure you qualify, then weigh up the pros and cons of Flexible Drawdown against other options and then start to plan, which is where our team of advisers come in to play.
Our team of Independent Financial Advisers are experienced in developing retirement income strategies for clients the length and breadth of the UK. If you are approaching retirement and would like advice on your options call one of our IFAs today on 0115 933 8433, alternatively enquire online or email info@investmentsense.co.uk
