Pension drawdown options

Up until 2011, buying an annuity was required by law by the time you reached the age of 75. Since the laws changed and Pension Freedoms was introduced, more and more people have taken an interest in using ‘drawdown’ to explore a more flexible approach to their pension pots.

In this article, we’ll talk about the various options that are available for anyone considering an income drawdown scheme.

 

 

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What my options?

Although there are two different types of pension drawdown, the only kind you’ll find available today is ‘flexi-access’. The other, known as ‘capped’ drawdown, is only supported for people who took them out before 2015, and these accounts are slowly moving over to flexi-access.

 

Capped drawdown

This is the ‘old’ form of income drawdown, and stopped being available after April 2015 (flexi access drawdown has since been introduced). The amount of money you can withdraw in any year is ‘capped’.

This cap is set at 150% of the income rate of the Government Actuary Department (GAD). This GAD rate is roughly equivalent to the average annuity rate.

 

What are my options if I have an existing capped drawdown scheme?

You can, technically, withdraw an amount that exceeds the capped income limit, but this will automatically enrol you onto a flexi-access drawdown scheme. This could affect the amount of tax-free money you can add to your pension each year – i.e. the amount you get by making contributions (your money purchase annual allowance reduces from a maximum of £40,000 to £4,000).

And, once you move into flexi-access, you can’t revert to a capped scheme, so this is not something to be taken lightly. Make an enquiry to speak with a pensions expert for more information.

 

Flexi-access drawdown

This was introduced from April 2015, and, as the name suggests, is a more flexible option. With flexi-access drawdown, you can take as much of your money out as you want, as many times as you want (both tax-free and taxable) because there are no GAD limits to adhere to.

 


 

Are there alternatives to pension drawdown?

Yes. There are two main alternatives…

  • Buying an annuity
  • Taking an Uncrystallised Funds Pension Lump Sum

 

Buying an annuity

This is a more traditional approach, in which you use your entire pension pot to buy an income stream from an insurance provider or annuity firm. You can read more in our comprehensive guide to annuities.

 

 

Taking an Uncrystallised Funds Pension Lump Sum

Another alternative is ‘Uncrystallised Funds Pension Lump Sum’ (UFPLS, or FLUMP). It is similar to drawdown, but in every withdrawal, it is compulsory to take the tax-free and taxable cash simultaneously.

In many scenarios, flexi-access provides a more helpful option than UFPLS. For example, savers can withdraw the taxable money in years where their tax liability is lower, or hold to the taxable part of their income for a greater period of time, allowing for the balance to compound in an investment account for longer.

Flexi-access has proven to be more popular than UFPLS on the main part, but UFPLS is sometimes used when your pension provider doesn’t offer drawdown.

 

Are there cases where UFLPS might work better?

There are still some scenarios in which UFLPS may be a more appropriate option. As with all things drawdown related, it’s important to take advice from a qualified pension advisor before making any decisions. Make an enquiry to speak to an expert pensions advisor today.

 

 


 

Speak to a UK pensions expert about your income drawdown options

If you like anything in this article or you’d like to know more, call us today on 0808 189 0463 or make an enquiry online.

Then sit back and let us do all the hard work in finding the pensions advisor with the right expertise for your circumstances.

 

They will carry out cashflow modelling with you to establish the very best course of action.

We don’t charge a fee and there’s absolutely no obligation.

 

We can arrange a free pension review for you today

70% of customers who have a pension review find a better deal

We can arrange a free pension review for you today

70% of customers who have a pension review find a better deal

Author:
Tony has worked in a vastly diverse array of areas in the pensions industry for over 2 decades. Tony regularly writes for trade press, usually on topical and pensions pieces as well as acting as a judge at prestigious national events. Tony is also a highly qualified Independent Financial Adviser in his own right. His mantra has always been "Hope for the best, but PLAN for the worst", and believes that the biggest impact that an adviser can have on a client's life journey is to take them on a journey from generally having little or no real idea of what their retirement will look like, to giving them the understanding of what their retirement looks like now, then helping them navigate a path to what they WANT their retirement to be.

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