One of the options when it comes to taking your pension money is known as flexi-access drawdown. This involves leaving your money invested for growth and taking out a regular income and/or occasional cash lump sums as required, perhaps for a new car, home improvements or a holiday cruise.
Flexi-access drawdown: is it right for you?
Before accessing flexi-access drawdown, you can take up to 25% of your pot as tax-free cash. The rest will be liable to income tax once you’ve exceeded the personal tax allowance.
As the name suggests, flexi-access drawdown gives you a great deal of flexibility in how you take your money but there are disadvantages too.
Here’s a bit more detail so you can see if it’s right for you:
• You choose how much you take out and when you take it
• This can help reduce your tax liability during retirement
• Your money stays invested and can continue to grow although it can go down in value too
• Any money left in your pot will pass to your beneficiaries when you die. If you die before age 75, it will be completely free of tax. If you die after 75, it will be taxed at your beneficiary’s marginal rate
• If your investment funds don’t perform as well as you’d hoped, or you live longer than expected, you could run out of money
• Withdrawing large amounts could push you into a higher tax bracket
• You need to consider carefully the funds you’re invested in so your pot remains healthy
• Some providers may charge for setting up a flexi-access drawdown account and for any changes or occasional withdrawals
Considering other options
Flexi-access drawdown is just one of your options. You may prefer to take all of your money in one go or buy an annuity which would give you a guaranteed income for life or a shorter period of your choice.
If you want to spread your 25% tax-free cash over a longer period, you can do something called ‘uncrystallised funds pension lump sums’.
This means you leave your pot invested and take out occasional lump sums when you need them. The first 25% of each withdrawal will be tax free. For instance if you have a pot of £100,000 and you take out £40,000, the first £10,000 will be tax free. The other £30,000 will be subject to income tax and the remaining £60,000 will remain invested.
You need to decide what’s best for you. If you need professional financial advice you can find a list of authorised advisers at unbiased.co.uk
If you’re over 50, you can get free guidance from the government agency Pension Wise. You’re entitled to a 40-minute session over the phone or face-to-face. The consultant will explain your options, helping you decide your best course of action.
Whatever you do, think carefully and don’t rush into anything. These are important decisions at an important time of your life.
Please note the information, data and any references in this article were accurate at the time of writing. Please check the date of the content if you’re looking for up to date investment commentary or tax-year related information.