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. 

Thinking about taking your pension as drawdown, or need some expert help with an existing drawdown scheme? Get in touch. We’ll put you in touch with a friendly pension advisor, who can take a look at your circumstances to help you make the best pension drawdown choices.

Here’s what you’ll learn in this piece:

What my pension drawdown 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 pension income drawdown 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. In flexi-access, 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: annuities and UFPLS. We go into more detail about both below.

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. 

What are the advantages of an annuity?

The main advantage of an annuity is a guaranteed fixed income that is not affected by the movements of the market. 

Other advantages include the fact that these products are much less complicated than drawdown and typically require less management. Once you buy an annuity, you could have an income that is guaranteed for the rest of your life.

It’s also worth mentioning that some pensioners are eligible for ‘enhanced’ annuities. These provide a greater income, but are only available to people with certain lifestyles or conditions associated with a shorter life.

What are the drawbacks of an annuity?

One of the major drawbacks of an annuity is that you are effectively ‘locked in’ once you buy one. The whole of your pot is exchanged for the annuity, limiting your choices and flexibility in future. This exchange also prevents you from investing and benefiting from any possible growth in your pension pot.

This is different to drawdown, in which you could draw an income whilst retaining your pension pot, and can take out only as much as you need.

What about taking a UFPLS?

A third 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. Speak to an advisor to find out which option is the right one for you.

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 an expert pensions advisor today. 

How do I make the right pension drawdown choices?

Like with everything in life, when it comes to pensions, everyone has different needs and has different means available to them. 

Pensions are complex, and have enormous, life-changing consequences. As such, it’s a safe bet to speak to an expert advisor, one who can help you to put together a plan that suits your needs and unique circumstances. 

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 here.
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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.