From 6th April 2015, from age 55, you can access as much of your savings from your Defined Contributions Pension Scheme (also known as ‘Money Purchase Schemes’) as you want under the new ‘pensions flexibility’ rules.
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Flexi-access Drawdown
One of the ways you can access your savings is through Flexi-access Drawdown.
You can put funds into drawdown with no limits on how much or how little you can take from your drawdown fund each year. You can take a tax free pension commencement lump sum of up to 25% of your pension pot when you put funds into drawdown. Any drawdown payments are taxed as income.
Taking a one-off or regular withdrawal from Flexi-access Drawdown will affect how much you’ll be able to pay into a pension in the future and still receive tax-relief.
Phased Retirement using Drawdown Pension
It is also possible to combine Phased Retirement with Drawdown Pension which would mean that you would start to draw an income from just part of your pension fund on one date including the tax free cash sum available from that part, leaving the rest of the fund intact. To increase your income at a later date, you could either increase the rate of withdrawal (provided you did not exceed the maximum limit if using Capped Drawdown) or start to draw an income, including the tax free cash sum, from a further slice of your pension fund.
Each time you start using a segment (or portion of your pension fund) for Drawdown Pension, you can first take part of the portion’s fund as tax-free cash (normally 25% of the portion). Converting portions of the fund regularly, for example once a year, means you can effectively use the tax-free cash, as well as the Drawdown Pension payments, to provide your income. The drawback is that if you stagger the conversion of your pension fund into Drawdown Pension, you will not be able to take all your tax-free cash from your total pension fund at once as a single lump sum.
Phased retirement can be a very useful financial planning tool, for example, if you want to ease back gradually on work and start to replace your earnings with pension income. It also provides more flexible help for your survivors if you die. On death, the balance of the pension fund that has not yet been used for Drawdown Pension can provide a pension for your surviving dependants or a lump sum, depending on the terms of the pension plan. Phased retirement is generally suitable only if you have a fairly large pension fund, or have other assets or income to live on. This is because the bulk of your pension savings remain invested, usually in the stock market, which may be more risky than buying an annuity straight away.
Capped Drawdown
You can continue in Capped Drawdown if you were in a scheme before the changes, but no new Capped Drawdown funds or Flexible Drawdown funds may be set up from 6th April 2015 onwards.
If you are in Capped Drawdown you may either convert your fund into a Flexi-access Drawdown fund or continue to take a Capped Drawdown pension form your arrangement. Speak with your pension scheme administrator if you want to convert to Flexi-access Drawdown.
You can add additional funds to your existing Capped Drawdown arrangements and your existing annual pension limits and review periods for Capped Drawdown will continue to apply. Capped Drawdown payments are taxed as income.
Things to consider when buying a drawdown plan
* Do the rule changes affect your plans?
If you’re using drawdown for the first time, you’ll be able to take advantage of the flexibility a Flexi-access Drawdown product offers.
* Other sources of retirement income
Do you have other sources of retirement income you can rely on to see you through retirement, such as a state pension?
* Regular reviews
Because your drawdown pot remains invested, you need to regularly review the performance of the funds you’re invested in and the level of any income you’re taking or pay a financial adviser to do this for you. This way you can make sure you don’t run out of money earlier than expected.
* Access to drawdown
Not all pension plans offer Flexi-access Drawdown, so you may have to transfer to another plan.