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Pension Drawdown & Flexi-Access Drawdown (FAD)
Clifford Osborne IFA offer advice on pension drawdown and flexi-access drawdown. Our pension specialists are based in Eastbourne, East Sussex and serve clients in Eastbourne, Lewes, Seaford, Bexhill, Hastings, Newhaven, Crowborough, Uckfield, Brighton, Hove and Tunbridge Wells. To arrange a free initial discussion at your home, workplace or our offices contact us today.
What is Pension Drawdown/Flexi-Access Drawdown (FAD)?
Under the option of FAD you can choose to immediately take 25% tax-free cash from your plan.
Instead of buying an annuity with the remainder of the fund, the money remains invested and can continue to benefit from investment performance in a tax-efficient environment. There will be no limit on the income taken.
After you have taken your entitlement to the tax-free lump sum at outset, you can choose to take as much or as little of the remaining pot as you wish and it will be added to any other income you have in that tax year to determine the income tax rate that will apply.
Please note that if you draw any income from this plan, your future money purchase pension contributions will be limited to a £10,000 maximum Annual Allowance.
As the rest of your pension fund remains invested in a tax-efficient environment, your final pension and the income you may withdraw each year will be determined by the continued investment management of your funds.
Careful attention, therefore, needs to be given to investment management whilst in Flexi-Access Drawdown to try to ensure that your income can continue for as long as possible and, if you do finally buy an annuity, you would be in a similar situation to that if you had bought an annuity at the start.
Pension Income Drawdown carries two main types of risk that need to be fully understood and considered before entering into this type of arrangement.
- Investment Risk: as the balance of the funds remain invested, the responsibility rests on the individual to manage the investments to protect the underlying capital to ensure the potential growth to provide a sustainable income stream to the required level.
- Mortality Risk: As harsh as it sounds, purchasers of annuities benefit from the early deaths of other annuity holders. This potentially valuable cross subsidy does not exist with pension income drawdown.
You are able to vary your income each year and the level of income you choose to take will have an effect on the value of your invested fund which will influence both future levels of income as well as the amount of any annuity income you may choose to buy.
Whilst in the short term many clients wish to consider drawing large amounts of income from their funds, in the medium to long term, it is important that you balance your income requirements with the investment policy to ensure the annuity purchasing power of your pension fund is maintained.
With this type of contract (together with the UFPLS option shown below):
The capital value of the fund may be eroded
The investment returns may be less than those shown in the illustrations
Annuity or scheme pension rates may be at a worse level in the future
When large amounts of income are taken or the maximum short-term annuity is purchased high levels of income may not be sustainable.
Benefits are means tested by the DWP.
Draw your benefits as UFPLS payment from your current scheme.
Your current pension arrangement could provide you with multiple or a one-off lump sum. 25% of this would be tax free, the remaining pot initially taxed at emergency rate then falling to marginal rate in the future. There is no limit on the size of the lump sum you choose to draw.
Please note that this type of payment will limit any future money purchase pension contributions to a £10,000 maximum Annual Allowance.
This option allows you to retire gradually. It can make the most tax-efficient use of your pension fund and it also allows you to build up the value of your pension when it suits you.
Generally, your pension fund is split up into 1,000 equal segments, and these segments can be phased in over a number of years.
Every time you phase in some segments, you can choose to receive a Tax Free Cash sum of up to 25% of the value of these segments, and the remainder of the fund will be used to buy you an annuity.
The pension bought will be guaranteed to be paid to you for life, and you can choose whether to buy a pension to continue for your spouse when you die, or one that increases in value each year.
The remaining segments will continue to be invested in a tax-efficient environment, providing the possibility of higher future income.
A Combination Plan
A Phased Flexi-Access Drawdown / Combination plan consists of two distinct parts. Firstly, the funds are transferred into the plan. The plan is split into a large number of identical (mini plans) benefits from which can be taken at different times. This provides a large degree of control over the amount and timing of the income to be taken.
Income is released by “opening” sufficient numbers of these mini plans to produce the required level of income. This is achieved by transferring the funds to the FAD element of the plan. When each mini-plan is opened, 25% of its fund value is released as tax-free cash.
The residual fund from each mini plan then remains invested in real assets and an income is drawn directly from this remaining fund. The income that is drawn from the FAD funds can be varied. Each income payment that you actually receive is therefore made up of part tax-free cash and part (taxable) income from the FAD element of the plan.
Important Risk Warning
HMRC has advised that where an individual flexibly accesses their pension benefits and takes an income stream that they then have a duty to tell the scheme administrators of any other pension schemes they have or join in the future.
This is your own personal responsibility. This is because the Annual Allowance will fall to £10,000 where an UFPSL payment is made and scheme administrators have a duty to inform HMRC if they think someone has paid pension contributions which exceed this limit.
You should note that, if you do not inform other scheme administrators that you have drawn income from your FAD within 91 days, you will be liable for a penalty provided.
Pensions are a long term investment. You may get back less than you put in. Pensions can be and are subject to tax and regulatory change therefore the tax treatment of pension benefits can and may change in the future.
We are IFA’s based in Eastbourne offering pension drawdown advice to those based in East Sussex, Eastbourne, Lewes, Seaford, Bexhill, Hastings, Newhaven, Crowborough, Uckfield, Brighton, Hove and Tunbridge Wells.
I was looking to bring all my various pensions together and drawdown 25% to help clear my mortgage. He ensured that all administration ran smoothly and everything has now been put in place.Ian
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