WHAT IS FLEXIBLE INCOME (DRAWDOWN)?
Take an income from your pension savings as you need it. The rest stays invested and can be passed on to your family when you die.
Flexible income lets you:
• Take an income – and change this anytime you want
• Dip in to your savings and take a cash withdrawal anytime you like
• Keep your pension pot invested, giving it the potential to keep on growing
• Change your mind and buy a fixed income (annuity) for life, anytime
• Pass on what’s left in your pot to your loved ones, free of Inheritance Tax, when you die
• If you die before age 75, this will be completely tax-free
• If you die after age 75 or over, they will be able to access the pension flexibly, at any age, subject to tax
You can access your pension savings anytime from the age of 55.
Is flexible income right for me?
It could be if:
• You’re comfortable taking some investment risk
• You’re prepared to regularly review and actively manage your income and investments
Your pot stays invested, so you’ll have to be comfortable taking the risk that if investments don’t perform well enough they might not be able to sustain the amount of income you need.
If you’re unsure about taking on these risks, flexible income may not be the best option for you. You could consider a fixed income for life instead.
What are the pros and cons?
Pros
Potential for your pension to grow
The invested part of your pension will have the opportunity to grow. You could benefit from future stock market growth free from UK income and Capital Gains Tax.
Flexibility
You can keep your options open and take an income as and when you need it.
Pass on your wealth
You can pass on what’s left in your pot to your loved ones, usually free of Inheritance Tax, when you die.
Investment choice
You’ll be in control.
Cons
No guarantees
You could run out of money if your investments perform poorly, you withdraw too much or you live longer than expected. Remember, your income stops when your money runs out so you need to consider the longer-term impact of making withdrawals from your pot because you could run out of money before you die.
Payments into any pension could be restricted
Going over your tax-free cash limit (when you start accessing taxable income) restricts the payments you or an employer can make to any of your pensions, normally to £10,000 a year. This can be a problem if you’re still earning and either have other savings you want to pay into a pension or if you intend to make significant payments into any of your pensions.
You’ll need to be hands-on
You’ll need to regularly review your investments and may need financial advice.
State benefits could be affected
Your entitlement to means-tested state benefits, if applicable, may be affected if you take cash or income from your pension – check this isn’t going to be a problem before going ahead.
What else can I do?
Let’s look at some examples of how flexible income can create financial freedom in your retirement:
Do more in early retirement
Take more of your money at the start of your retirement and do the things you enjoy. As you get older, you might find you need to spend less.
As we’re all aware, your circumstances can change at any time. With flexible income, you can adapt your income to meet your changing situation.
Retire early or go part-time
If you have pensions elsewhere, you could retire early or go part-time by taking a flexible income from your pot before your main pension starts.
Change to a fixed income anytime
Start with a flexible income. Then when you reach 75, you could buy a fixed income giving you a guaranteed income for the rest of your life.
Balance of peace of mind and flexibility
You could use some of your pension savings to secure a fixed income to cover the essentials such as bills and living costs, then use the flexible income to cover life’s extras.
Taking a flexible income and fixed income could offer a good balance of peace of mind and the flexibility to adapt to life’s changes. T
ax rules and legislation can change. Any information given is based on our understanding of law and current HM Revenue & Customs practice as of April 2016.
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