Flexi-access drawdown explained

Planning how to access your pension savings is one of the most important financial decisions you’ll make. With so many options to choose from, it’s normal to feel unsure about which one aligns best with your goals.

Should you take a lump sum? Opt for a guaranteed income with an annuity? Or choose a more flexible option, such as flexi-access drawdown?

Flexi-access drawdown has become a popular choice for retirees who value flexibility and want to keep their pension invested. At Wealthify, we offer flexi-access drawdown as one of the ways to help you manage your retirement savings.

In this article, we’ll cover:

• What is flexi-access drawdown
• How does flexi-access drawdown work
• Who is eligible for a flexi-access drawdown?
• The benefits of flexi-access drawdown
• Disadvantages of flexi-access drawdown
• Tax on flexi-access drawdown
• Flexi-access drawdown vs other options
• Can I transfer my flexi-access drawdown pension to another provider?
• Is flexi-access drawdown right for you?
• Summary

What is flexi-access drawdown

Flexi-access drawdown is a way of accessing some of your pension money while keeping the remaining funds invested. Here’s how it works:

Flexi-access drawdown gives you control over your withdrawals and allows your remaining pension pot to potentially grow through investments. However, this also means that your income is not guaranteed (like you’d see with an annuity) and the fund’s value depends on the performance of your investments.

How does flexi-access drawdown work

Once you’ve taken your 25% tax-free lump sum (PCLS), the rest of your pension pot enters what’s known as drawdown.

From there, you can start making withdrawals, either as a regular income or occasional lump sums, depending on your needs. However, any money you take beyond the tax-free amount will be subject to income tax.

Example scenario

Let’s say you have a pension pot worth £200,000. You decide to take the full 25% tax-free lump sum, which gives you £50,000 upfront. The remaining £150,000 stays invested, and you decide to withdraw £15,000 annually, but paid to you on a monthly basis (leaving the majority of your fund invested).

These withdrawals would be taxed at the relevant income tax rate. (Your tax treatment will depend on your individual circumstances, and it may be subject to change in the future.)

Who is eligible for a flexi-access drawdown?

To be eligible for flexi-access drawdown, you must:

• Be aged 55 or older (rising to age 57 from 2028), unless your pension policy says otherwise.
• Have a defined contribution pension pot. Flexi-access drawdown is not available for defined benefit (final salary) pensions unless transferred to a defined contribution scheme, which is not usually advisable due to their generous benefits.

At Wealthify, we cannot accept any transfers to our Self-Invested Personal Pension from a defined benefit scheme.

The benefits of flexi-access drawdown

Flexi-access drawdown offers several advantages, making it an attractive option for many retirees:

1. Tax-free lump sum: You can take up to 25% of your pension pot tax-free, under the Pension Commencement Lump Sum rule.
2. Potential for growth: Keeping your pension invested for longer could allow it to grow further over time, though this isn’t guaranteed and depends on market performance. Opting for an annuity, for example, wouldn’t allow this further growth potential.
3. Flexible income: You decide how much to withdraw and when, giving you control over your retirement income and budget.

Disadvantages of flexi-access drawdown

While the flexibility is appealing, it’s essential to also consider the potential downsides:

1. Risk of running out: Unlike an annuity, there’s no guaranteed income for life. If you withdraw too much of your pension, or your investments perform poorly, your pension pot could run out.
2. Investment risk: The value of your investments can go down as well as up, so there’s no guaranteed certainty about future returns. Throughout your retirement, you may want to do an annual check-up on how your pension investments have been performing and adjust your budget/withdrawal around that.
3. Tax implications: Withdrawals above your 25% tax-free amount are subject to income tax. Plus, once you access your pot, the Money Purchase Annual Allowance (MPAA) reduces the amount you can continue to contribute to your pension pot(s) every year to £10,000.

Tax on flexi-access drawdown

Income tax on flexi-access drawdown withdrawals

Any withdrawals beyond your 25% tax-free lump sum are treated as income and taxed at your marginal rate.

For instance, if your annual income (including pension withdrawals) is between £50,271-£125,140, you’ll be considered a higher rate income taxpayer.

If your total annual income exceeds £125,140, you’d cross into the additional income tax band. (Correct at the time of writing, this amount could be subject to change in the future.)

Money Purchase Annual Allowance (MPAA) explained

As mentioned, once you start drawing down the remaining 75% (the taxable amount after your 25% tax-free lump sum), the MPAA would be triggered. And this limits how much you can keep contributing to your pension pots in a tax-free way.

The pension annual allowance is a possible maximum of £60,000. But with the MPAA triggered, this drops to £10,000 per tax year. This could affect those planning to continue working into retirement who were hoping to continue building their pension pot(s).

Inheritance Tax on flexi-access drawdown

Flexi-access drawdown could offer favourable Inheritance Tax treatment.

If you pass away before age 75, any remaining funds would usually be passed to your beneficiaries tax-free as long as the value is less than your Lump Sum and Death Benefit Allowance (£1,073,100 for most people).

After age 75, withdrawals made by your beneficiaries will be taxed at the relevant income tax rate.

This is down to your pension provider’s discretion, so it’s worth keeping your pension’s nominated beneficiaries (who you’d want your pension to go to) up to date.

However, one thing to be mindful of in terms of Inheritance Tax is that the rules for it are set to change in April 2027, and after then, any unused portion of a pension pot will be included in a person’s ‘estate’ (the overall value of their assets including property, savings, jewellery, etc.). Still, the estate’s total value needs to be over a specific threshold for this to apply.

Flexi-access drawdown vs other options

Flexi-access drawdown vs annuity

Capped drawdown vs flexi-access drawdown

Capped drawdown, which limited withdrawals to a set amount, is no longer available to new retirees (it ended 6^th April 2015) ^[1]. Flexi-access drawdown replaced it, offering greater flexibility.

Flexi-access drawdown vs UFPLS

The Uncrystallised Fund Pension Lump Sum (UFPLS) allows you to take lump sums from your pension pot without entering drawdown, and you can do this until the pension pot runs out.

With the UFLPS option, you can take lump sums from any pension you haven’t started taking a drawdown from yet. With UFPLS, if you were to take a £1,000 lump sum out, £250 would be tax-free and £750 would be taxable.

This is different to opting for flexi-access drawdown — where you opt for an initial Pension Commencement Lump Sum (PCLS) and then drawing down the remainder as a regular income.

The pros and cons of each come down to how you manage your budget in retirement and how long you expect the pension pot to last.

Can I transfer my flexi-access drawdown pension to another provider

It may be possible to transfer your flexi-access drawdown arrangement to another provider, if they accept this as part of their policy*. However, you must transfer the entire arrangement if that’s the case.

*Wealthify, for example, doesn’t accept:

• Pensions you’re already taking an income from;
• Crystallised plans;
• Pensions with a defined benefit (DB), guaranteed annuity rate (GAR), final salary promise or guaranteed minimum pension (GMP);
• Pensions with protected benefits such as Protected Tax-Free Cash, or Protected Pension Age;
• Overseas pensions, including Qualifying Recognised Overseas Pension Schemes (QROPS).

If you are looking around to switch providers, common reasoning might include:

• For better investment options,
• For lower fees,
• For a better service from another provider.

Before transferring, it’s essential to compare providers carefully, compare fees (including any exit charges) and seek financial advice to avoid any pitfalls.

Is flexi-access drawdown right for you?

Flexi-access drawdown could be a good fit if you:

• Want to take an initial tax-free lump sum, then a flexible income.
• Are comfortable keeping your pension invested and managing some risk.
• Want the opportunity for your pension to keep growing over time.

However, it’s not for everyone. If you’re risk-averse or rely on a guaranteed income, options like an annuity might be more suitable.

Summary

Flexi-access drawdown could offer you flexibility, control, and the potential for investment growth. But it also comes with risks, including the chance of running out of funds. Deciding whether it’s the right choice depends on your financial situation, goals, and attitude toward risk. You may decide that this mix and match isn’t quite aligned with your retirement plans. Wealthify’s complete drawdown options include:

• Pension Commencement Lump Sum: taking a 25% lump sum tax-free cash when you reach retirement age.
• Flexi-access drawdown: combining taking the PCLS lump sum withdrawal mentioned above, followed by then taking the remaining 75% as regular taxable income.
• Uncrystallised Fund Pension Lump Sum: UFPLS is slightly different to the PCLS, as these are taken as lump sums from any pension that the person hasn’t taken drawdown from yet.
• Small Pots: these follow the same rules as the UFPLS, but are only for pots that are £10,000 or less.

If you’re approaching retirement age and want to explore one of these drawdown options further, or are shopping around for the right provider to take you into retirement, find out more about our personal pension:

References:

[1]: Capped drawdown | MoneyHelper