Flexible retirement income
Re-investing funds designed to provide you with a regular taxable income
With this flexible retirement income option known as ‘flexi-access drawdown’, you can normally take up to 25% (a quarter) of your pension pot or of the amount you allocate for drawdown as a tax-free lump sum, then re-invest the rest into funds designed to provide you with a regular taxable income. You set the income you want, though this might be adjusted periodically depending on the performance of your investments. Unlike with a lifetime annuity, your income isn’t guaranteed for life – so you need to manage your investments carefully.
Some older policies might allow you to take more in tax-free cash – check with your pension provider. You then move the rest into one or more funds that allow you to take a taxable income at times to suit you. Increasingly, many people are using it to take a regular income. You choose funds to invest in that match your income objectives and attitude to risk, and set the income you want.
The income you receive might be adjusted periodically depending on the performance of your investments. Once you’ve taken your tax-free lump sum, you can start taking the income right away or wait until a later date. You can also move your pension pot gradually into income drawdown.
You can take up to a quarter of each amount you move from your pot tax-free and place the rest into income drawdown.
You can, at any time, use all or part of the funds in your income drawdown to buy an annuity or other type of retirement income product that might offer guarantees about growth and/or income. You need to plan carefully how much income you can afford to take under flexi-access drawdown, otherwise there’s a risk you’ll run out of money.
This could happen if you live longer than you’ve planned for or you take out too much in the early years. It could also be a problem if your investments don’t perform as well as you expect, and you don’t adjust the amount you take accordingly.
If you choose flexi-access drawdown, it’s important to review your investments regularly. Not all pension schemes or providers offer flexi-access drawdown. Even if yours does, it’s important to compare what else is on the market, as charges, the choice of funds and flexibility might vary from one provider to another.
Any money you take from your pension pot using income drawdown will be added to your income for the year and taxed in the normal way. Large withdrawals could take you into a higher tax band, so bear this in mind when deciding how much to take and when. If the value of all your pension savings is above £1,030,000 when you access your pot (2018/19 tax year), further tax charges might apply.
You can normally receive tax relief on pension contributions to a defined contribution pension scheme of up to £40,000 or 100% of taxable salary each year (if lower than £40,000). This is known as your ‘annual allowance’.
However, if you start to draw an income from a flexi-access drawdown scheme, the amount you can pay into a pension and still get tax relief reduces. This is known as the ‘Money Purchase Annual Allowance’ (MPAA). The MPAA for the tax year 2018/19 is £4,000. If you want to carry on building up your pension pot, this might influence when you start taking income. You can nominate who you’d like to get any money left in your drawdown fund when you die.
If you die before the age of 75, any money left in your drawdown fund passes tax-free to your nominated beneficiary, whether they take it as a lump sum or as income. The money must be paid within two years of the provider becoming aware of your death. If the two-year limit is missed, payments will be added to the income of the beneficiary and taxed as normal.
If you die after the age of 75, and your nominated beneficiary takes the money as income or a lump sum, the money will be added to their other income and taxed as normal.