Collecting pension payments by flexible drawdown can give retirement savers financial freedom, as their income is uncapped providing they keep within certain guidelines.
The pension has no annual limits, so investors can take as little or as much – including all the fund v- if they wish.
But this advantage is also one of the big disadvantages of flexible drawdown, as all the pension can go at once, leaving no further cash in the pot to fund retirement.
Although flexible drawdown sounds like the ideal pension solution for many, not everyone will qualify to take part.
The main rule is a retirement saver must demonstrate they have a minimum annual income of at least £20,000 without touching any of the cash in their private pension.
Flexible drawdown
Once in flexible drawdown, the features include:
- Investors can take as little or as much income each year as they want – but all payments are taxed after the initial tax-free lump sum is extracted from the fund.
- This flexibility lets investors adjust income levels to tax paid
- Undrawn funds remain invested and can still grow with tax breaks
- None of the fund has to be drawn, so investors can consider tax-effective succession planning
Not all the features of flexible drawdown are positive, for example:
- As retirees are living longer, flexible drawdown offers no guaranteed return or income and may run out years before death
- Taking too much cash at the outset could affect payments in later years
- Although the Treasury sets the £20,000 minimum income requirement, many investors may not hit this level until their state pension kicks and may need income rather than flexible drawdown to reach his level
- Flexible drawdown also comes at a cost from providers that needs building into retirement planning
If the investor died after reaching 75 years old without drawing down the pension’s 25% tax-free lump sum, this money could be subject to a 55% tax charge
Pension drawdown alternatives
Flexible drawdown alternatives include capped drawdown, which has no MIR but a limit on the amount available to take from a pension each year, and an annuity.
Capped drawdown is reviewed regularly and is based on the ‘GAD’ figure – the percentage amount of a pension that the Government Actuaries Department sets.
GAD is currently 120%, which means the capped drawdown can be no more than 120% of the income an annuity would pay if bought with the same pension fund.
An annuity is an insurance backed contract that pays a guaranteed amount each month for life.
