Pension freedoms’ were introduced by the Government in April 2015. Traditionally, people would buy an annuity with their pension savings and the annuity would pay a guaranteed income for the rest of their life. The new rules mean that you now do not have to do this – you can access all of your pension savings from the age of 55 and do whatever you like with them.
Flexi access drawdown gives you the flexibility to withdraw your pension when you need; it also allows you to invest your pension, allowing your money to grow.
Flexi-access drawdown suits people who are prepared to take some investment risk in return for a potentially higher income, or people who want the flexibility to vary their income or dip into their savings from time to time.
With flexi access drawdown you will be able to make further pension contributions, however, if you take any income or withdraw a lump sum in addition to the tax free lump sum, you will have a reduced annual allowance of £4,000 for future contributions to defined contribution plans. This is known as the Money Purchase Annual Allowance and where you remain a member of a defined benefit occupational pension scheme, you will also benefit from the standard annual allowance for these contributions.
You should think about reviewing your income every year as well as the decision on whether it might be appropriate to purchase an annuity at that point.
If you die with funds remaining in a drawdown plan your beneficiaries will have the option of continuing to take Drawdown Pension, buying an annuity or taking the remaining fund as a lump sum. If you die aged under 75, drawdown income, annuity income and lump sum payments will be tax free and if you die on or after age 75 the income payments or lumps sums are taxed on the recipients at their marginal rate(s).
Flexi-access drawdown gives you the flexibility to plan your retirement the way you want. You get the freedom to access your pension as and when you like, so you can plan out your retirement to suit your lifestyle.
You can take your tax-free cash lump sum immediately to spend or invest as you wish without the need to take any income at all if this suits your circumstances.
Subject to limits imposed by legislation (with capped drawdown), you will be able to plan in advance the level of income that you wish to take each year, so that you can take into account any other sources of income which may become available to you.
There are products available which offer a level of guaranteed income which is paid regardless of the performance of the investments in your pension fund thereby removing some of the risk involved with Drawdown Pension (albeit at a price and subject to specified conditions being met).
If the Drawdown Pension product is set up within a Self Invested Personal Pension (SIPP) wrapper, this will permit access to a wide range of investments and enable the investments to be rearranged easily if required (and usually more cost effectively than switching between product providers).
With careful planning, flexible access drawdown means you can make the most of your pension whenever suits you. So if you are planning a trip around the world, paying off debts or want to upgrade your home, flexible-access gives you the freedom to do those things while also making sure you have the funds for your entire retirement.
You can usually take up to 25% of your pension fund as a tax-free lump sum. You can structure your income to mitigate liability to personal income tax. By reducing your income in some years, you may be able to avoid a higher rate tax liability.
With flexi access drawdown, you may withdraw an unlimited amount from your pension fund, although all amounts withdrawn will be taxed as income at your marginal income tax rate(s).
The amount of income you can withdraw under a capped drawdown plan is based on the Government Actuary’s Department (GAD) tables which are based on age but do not take health into account.
For flexi access drawdown you can choose how much income you want to withdraw without reference to any rates or limits other than the size of your pension fund.
If you or your spouse is relatively young, a secured pension (lifetime annuity or scheme pension) would be less attractive due to the lower mortality factor and, in addition, there is a longer timescale to take advantage of the potential investment rewards and risks of Drawdown Pension.
Your beneficiaries can continue to take withdrawals from any remaining drawdown fund on your death (annuity purchase is also an option) or take the remaining fund as a lump sum. If you die before age 75, any income or lump sums taken by your beneficiaries will be tax-free.
Flexi-access drawdown allows you to continue to invest your pension pot tax-free. With careful planning, your pension can continue to grow throughout your retirement. Flexi access drawdown also gives you access to a broader range of investment opportunities.
Investing in relatively safe areas such as cash and gilts is unlikely to enable a higher lifetime income to be achieved than with a secured pension, therefore, investing in the type of assets that might achieve the extra returns necessary will involve risk. The shorter the term to the intended date of purchasing a secured pension, the greater the risk.
The value of your pension fund may go down as well as up and investment returns may be less than those shown in the illustrations.
Taking withdrawals may erode the capital value of the fund, especially if investment returns are poor and a high level of income is being taken. This could result in a lower income if/ when an annuity is eventually purchased.
If investment returns do not at least match the critical yield (in simple terms, the value of growth required to provide an equivalent income at the age you intend to purchase an annuity) your eventual income is likely to be less than that which could have been available via the annuity route.
Annuity rates may be at a lower level if/ when annuity purchase takes place and there is no guarantee that your income will be as high as that offered under the other options referred to earlier.
There is no guarantee that annuity rates will improve in the future. They could be lower if/ when you decide to purchase an annuity than they are currently. Your pension may be lower than if you bought a lifetime annuity now.
High levels of drawdown pension may not be sustainable in the longer term.
If you intend to invest some or all of your pension fund, there may be charges involved with the new investment.
If you withdraw large amounts of capital from your drawdown fund, these may impact on any means-tested benefits you are in receipt of.
A financial adviser will help you to look at your overall goals and decide on a realistic, achievable plan. An adviser will make you think in detail about how you would like to spend your retirement and how your pension can provide it. Our Chartered team of experts provide you with a bespoke, accurate analysis of your retirement position to help you decide the best plan for you.
As you get further into retirement, your needs are likely to change. A financial planner will keep a close eye on your investment, making sure you’re always getting the most out of your money. Yearly reviews can help you adapt and make changes to your retirement plan. A financial planner can also help to keep you on track during retirement making sure that you do not run out of money.
Managing your tax during retirement can be complex and things like withdrawing money are not always as simple as they seem. A small oversight could end up costing you cost you hundreds of thousands in tax which could be avoided. An adviser can help you manage your tax during retirement and make sure that your finances are as tax efficient as possible.
There are seemingly endless pension solutions available, each with different rules and regulations. An adviser can help to narrow down your available options and provide you with a range of plans that are best suited to you. An adviser can also help you to understand investments opportunities along with the potential risks.
At Imperial Chartered, we strive to give the best possible advice to all of our customers. That is why we aim for all of our advisers to become chartered. Chartered Status is the profession's gold standard for financial planners. Royal Charters are granted by the sovereign on the advice of the Privy Council and have a history dating back to the 13th century. This confirms that every Chartered Financial Planner has completed a suite of professional qualifications equivalent to a Bachelors' degree.