PENSION DRAWDOWN / FLEXI-ACCESS DRAWDOWN
Pension Drawdown is a type of personal pension and is an individual plan held in your own name that enables you to access your Tax-Free cash entitlement (typically 25% of your pot) and defer taking the income payments until you choose to do so. This may be immediately or at any time in the future.
Flexi-Access Drawdown allows you to withdraw further lump sums from your pension, over and above your Tax-Free entitlement, at any time and without limit (subject to income tax).
On transfer to a Flexi-Access Drawdown arrangement you are entitled to a Tax-Free cash lump sum of up to 25% of the fund value; this does not have to be taken all in one go and can be staggered over a number of tax years.
You may also immediately begin to draw an income should you wish to do so. The “income” you can draw is only limited by the value of your pension pot and may be adjusted periodically depending on the performance of your investments.
What you need to know about Pension Drawdown
Flexi-Access Pension Drawdown allows you to benefit from an immediate Tax-Free lump sum and draw an income from the balance of your fund. Your fund in excess of the Tax-Free cash entitlement remains invested in your name, and importantly, will pass on to your beneficiaries in the event of your death.
Careful attention therefore needs to be given to investment management whilst in drawdown to try to ensure that the income withdrawals are sustainable throughout your life – otherwise you run the risk of course of depleting your pension pot totally.
In simple terms, if you are drawing out more in income than the funds are generating, your pension pot will go down in value. Eventually you may run out of money and not have enough to live on later in life.
Who may Pension Drawdowns be suitable for?
Flexi-Access Pension Drawdown is a complex arrangement and is not suitable for everyone. It is very important that you understand the nature of this type of arrangement, the risks involved, and how it may impact on your ultimate post-retirement benefits.
Flexi-Access Drawdown is generally designed for those with larger pension funds (in excess of £100,000) but everyone can now take advantage of these contracts if the circumstances are suitable.
The main advantages of Pension Drawdown are:
• You have immediate access to the whole of your Tax-Free cash sum.
• You do not have to buy an immediate annuity and have flexibility over how and when income may be drawn.
• You can defer buying an annuity indefinitely.
• You choose the level of income required. This includes taking zero income or cashing in the pot all in one go.
• Your pension fund remains invested and can therefore benefit from investment returns.
• There are often greater death benefits available i.e. return of fund value to your beneficiaries.
• Pension monies are outside of your estate for Inheritance Tax purposes.
The disadvantages of Pension Drawdown are:
• The value of your fund can fall as well as rise and you may be worse off in the long term.
• You are taking on an investment risk, returns may be lower than expected or planned for.
• Your income withdrawals may not be sustainable and you may eventually run out of money.
• Whilst it offers greater flexibility, the investment return required to offset the higher charges together with the ‘mortality drag’ create a degree of further investment risk. This risk being dependent also on the level of income being withdrawn.
• The level of risk increases the higher the income drawn.
• High income withdrawals may not be sustainable over the longer term.
• Future annuity rates may not improve and income levels can fluctuate over the longer term. The ultimate annuity purchased may be lower than could have been purchased at outset, if an annuity were of course ever to be purchased.
Flexi-Access Drawdown arrangements are not suitable for everyone and the material contained herein is for information only and does not constitute advice.
It is important that you seek professional advice from a pension specialist such as ourselves at Independent Pension Specialists Ltd before proceeding with any Flexi-Access Pension Drawdown arrangement.
If you would like to discuss your options in more detail and draw on the specialist, expert advice we provide here at Independent Pension Specialists Ltd, simply call us on 01622 238000 or complete the “Contact Us” form.