Flexi-access drawdown - frequently asked questions. 

Answering your questions about drawdown

Drawdown is one of your options for taking an income from a defined contribution (money purchase) pension scheme. 

Available from age 55 (age 57 from April 2028) it’s where you invest your pension pot and take money from it as regular income or ad-hoc payments. An alternative is an annuity, which carries no investment risk and provides the security of guaranteed income.

You can read our guide to income drawdown for comprehensive information about how it works, and our summary of the benefits and risks of drawdown. 

To add further to your understanding of drawdown, on this page we have collected together some of the frequently asked questions.

This should be read in conjunction with the Key Features Document (KFD) relevant to the provider of your flexi-access drawdown plan, their quotation and any other documentation they refer to. Any references we make to taxation are based on our understanding of current legislation and HM Revenue & Customs practice which can change.

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What is flexi-access drawdown (FAD)?

Flexi-access drawdown is a form of personal pension that enables you to take an income directly from your pension fund, keeping it invested, without having to buy an annuity, hence you retain control of your pension fund and therefore your investments.

You are able to take 25% of your pension pot as tax free cash, with the balance being treated as taxable income. You can take regular income or irregular income from your fund and even postpone your income should you wish.  

This option can be useful if you want to keep your options open for the future, especially if you anticipate a change in your circumstances. 

How does it differ from other options?

A standard lifetime conventional or enhanced annuity provides guaranteed payments for life, no matter how long that is. So your future annuity payments are known in advance. However, once set up, the payment terms cannot be altered, even if your circumstances change.

Flexi-access drawdown offers you more flexibility without committing to a lifetime annuity. However, you need to be satisfied with ongoing investment risk, in that the value of your fund and therefore your income, may go down depending on the performance of the underlying investment. This option however, offers greater death benefits than a standard conventional or enhanced lifetime annuity.

A fixed term annuity is written under the same drawdown rules as flexi-access drawdown to provide a regular level of income for a specified time period e.g. five years. At the end of the specified term, a guaranteed maturity amount is paid for you to reinvest in an annuity or another retirement product available at that time or to take as a lump sum, subject to income tax.

Flexi-access drawdown is more flexible than a fixed term annuity as you have the ability to vary your income. It also offers the potential for your fund to benefit from investment growth, which is not available through the fixed term annuity.  

Uncrystallised Fund Pension Lump Sum (UFPLS) enables you to take your pot as a cash lump sum. You can normally take 25% as tax free cash, with the balance subject to tax at your marginal rate. Alternatively, you can take a series of lump sums, where 25% of the amount paid is tax free, with the balance taxable as pension income. Please note that this option can result in you paying higher rate tax.

Flexi-access drawdown differs from UFPLS, which is normally only available through your current provider, in that you have the flexibility of taking your tax free lump sum and being able to leave the balance invested, to provide an income and to pass on to your loved ones in the event of your death.

How much income can I take from drawdown?

The predecessor to flexi-access drawdown, called flexible drawdown, had a minimum income requirement of other secured income (State Pension and other pensions in payment) of £12,000pa. But with flexi-access drawdown, there is no restriction on the level of income that you are able to take. However, you should be mindful that taking a high level of income may result in your fund being depleted and not lasting for the rest of your life.

If you are using drawdown to defer buying an annuity, remember that drawdown income is dependent upon investment performance and future annuity rates are unknown. Therefore, delaying a decision to buy an annuity could result in you obtaining a lower income than if you had purchased an annuity at the outset.

Do I have to take an income from my plan?

No. You don’t have to take an income if you don’t want to. So if you only want access to the tax free cash, this is possible. The balance will then be invested in one or more of the funds that are offered to you that are commensurate with your attitude to risk.

Can I take my tax free cash from a flexi-access drawdown plan?

Yes, even if you decide not to take your tax free lump sum at outset, you will have the opportunity to take it later. Alternatively, if you do not need to take your tax free cash as a lump sum, under FAD, you could consider using your tax free lump sum to help provide a tax efficient income over the first few years. Each income payment being 25% tax free and the balance taxable - similar to UFPLS above.

Can I change my income during the term?

Once the flexi-access drawdown plan is set up, you have the option to change your income level at any time. You can also stop and restart income on request, potentially to help avoid paying higher rate tax.

What term can I select?

Flexi-access drawdown has no fixed term, although you need to consider investing for the medium to longer term to give your investments the time to grow.

Can I still make pension contributions?

Yes you can, although if you opt for flexi-access drawdown, the annual allowance, or cap on the amount you can contribute into a pension, of £60,000 pa will be reduced to £10,000 pa. This is called money purchase annual allowance (MPAA) and is triggered on taking up FAD.

Do individuals have to tell anyone that they’ve triggered the money purchase annual allowance?

Yes. When you first flexibly access your pension, the scheme administrator has to provide a statement to you within 31 days. You then have to notify any other schemes that you’re an active member of (i.e. where contributions are being paid to a money purchase scheme or you’re accruing benefits under a cash balance or hybrid scheme) within 91 days of receiving your statement, so that they’re also aware that the £10,000 money purchase annual allowance will apply.

What if I have a change of circumstances?

FAD is very flexible. If your circumstances change, you can buy an annuity at any time or transfer to another drawdown pension plan. Please note that if you transfer out in the early years your investments may not have had time to grow and it is likely you will receive less than you paid in.

What happens to my income on death?

In the event of your death, flexi-access drawdown enables you to pass on your fund to your spouse or partner, or anyone else you nominate. If you die before age 75, your fund can be paid out tax free and if you die post age 75, the lump sum or income would be taxed at your beneficiary’s marginal rate.

If your spouse or other beneficiary takes out another FAD with your fund, on their subsequent death, the remaining fund can be passed on, potentially tax free (if below age 75), to their named beneficiaries, moving down the generations.

Update – October 2024 Autumn Budget: 

In the Budget of 30 October 2024, the government announced that pension savings will be considered part of someone’s estate and liable to inheritance tax (IHT) from April 2027. This will be within existing IHT rules: IHT is not payable by a person’s spouse or civil partner, and is only typically payable on estates over relevant IHT thresholds.

Another aspect of inherited pensions is income tax. Currently, if you pass away before age 75 any pension funds or annuity income your beneficiaries receive is free of income tax, whereas they are liable for income tax at their marginal rate if you die after age 75. Retirement Line’s understanding is that beneficiaries may still be liable for income tax on inherited pension income from April 2027, although it isn’t clear whether the ‘age 75’ rule will remain.

More information will be available following a government consultation period that will run until early 2025. We are monitoring this issue and will report on it once the matter is clarified. Please see our Budget report for more information: Budget 2024 – pensions brought into inheritance tax from 2027.

Can I add my own money to purchase another annuity when my plan matures?

If you have other pensions available in the future, you can add them to your residual fund and search again on the open market for another retirement income product.

What are the pros and cons of drawdown?

Flexi-access drawdown is very flexible, but there are risks as well as benefits. The main risk is that as your fund remains invested, the value can go down as well as up, which may result in your fund being depleted over time and not lasting for the rest of your life. 

Please see our comprehensive Benefits and risks of income drawdown page for a balanced review of the pros and cons of drawdown.

What does Martin Lewis say about pension drawdown?

Martin Lewis and his Money Saving Expert (MSE) website have mentioned pension drawdown a number of times. For example, in an MSE news item of 2021 (Martin Lewis warns of a tax trap that could cost you £10,000s off your pension) Martin pointed out how consumers may be able to use drawdown or an annuity to pay less income tax in some circumstances. 

Martin warned that leaving your money in your pension pot and taking cash withdrawals from it means that 75% of each withdrawal is taxed. For some people who are still working, this brings the risk of pushing them into a higher-rate tax bracket.

He contrasted this with taking a tax-free lump sum of 25% of your pension pot and putting the rest into pension drawdown or an annuity. You would then phase additional withdrawals or income payments, and potentially be able to do so in a way that doesn’t take you into the next tax bracket.

Martin Lewis’ MSE site also included a brief summary of how pension drawdown works in their article Pension need-to-knows. They also offer more detailed information in their downloadable 40-page ‘Guide to taking your pension’.