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What is Pension Withdrawal AKA Flexible Drawdown?
Flexible Drawdown is the process of drawing money from a pension in a way (or shape) that you want or need as opposed to a more “traditional route” of buying an annuity or taking income via a scheme. In simple terms, if your pension income could eventually stop (if your pension fund becomes exhausted) then you are probably using a flexible drawdown approach.
Other names for a flexible strategy can include:
- Pension withdrawal
- Pension drawdown
- Income drawdown
- Flexible drawdown
- Flexi access drawdown
Available since 2015, as long as you have reached the minimum pension age (currently 55 but rising to 57 from April 2028) then you are free to draw your pension in a way that suits you.
Making withdrawals from your pension will have tax implications so much care is needed but if you really want to, you can withdraw your entire pension on day 1! (Although this would then leave you with no income later in retirement).
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Cashing in Pensions at 55 (57 from 2028) – aka Pension Release
FlVery simply, HMRC rules usually allow:
- Up to 25% of your pension to be drawn tax-free (known as Pension Commencement Lump Sum or “PCLS”)
- The remaining 75% being subject to income tax depending on your income position.
This provides the flexibility to manage your tax liability. You could even take your pension in one go, but this could mean you pay a horrific amount of tax! Whereas you could take your money more slowly, possibly over multiple years to minimise or even eliminate paying any tax.
If you have a small pot, (ie: less than £30,000). Other routes such as “small pot encashment” or “trivial commutation” could be used. Again, tax liabilities can apply so care is needed.
Cashing in a pension can also trigger something called “The Money Purchase Annual Allowance” which would forever limit how much tax relief can be generated in the future so care is needed before committing to a decision.
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How does it work?
Flexible Drawdown allows you to take money from your pension in many different ways. These could include:
- Partial tax-free cash (lump sum)
- Full tax-free cash (lump sum)
- Regular tax-free cash payments (as income)
- Regular taxable income payments (as income)
- Ad-hoc or one-off income withdrawals (lump sums)
- And, in any combination of these!
By using drawdown and taking your withdrawals slowly, any money not drawn out immediately will remain invested, hopefully growing and thereby providing an even bigger pot to draw from in the future. Another feature could be that on your death, any unused pensions can be made available to your family (including any spouse, unmarried partner or children for example).
The alternative to using a drawdown strategy is to take benefits via a scheme pension or use your pension to purchase an “annuity”. In other words, by giving up the greater flexibility, you could secure a guaranteed income payable for the rest of your life instead. Remember, pension withdrawals can result in tax implications so extreme care should be taken.
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Take extreme care!
For example, always check:
- The providers involved are reputable. There have been cases of fraud and “pension liberation” type scams, check the FCA register here: https://register.fca.org.uk/s/
- The tax implications of your withdrawal strategy?
- Are charges payable each time you take a withdrawal?
- Are there any limits or restrictions on how many withdrawals you can take?
A lot of older pensions will not allow any flexible drawdown and may suggest, imply or even force you to buy an annuity instead! By transferring to an arrangement that will allow flexible drawdown you can then access the increased flexibility instead.
Our advisers are experts in drawdown and tax planning meaning you get the very best advice that you can trust every single time. Get in touch today!
Can I cash in my Pension before 55 (57 from 2028)?
Unless you are in ill-health, the simple answer is NO! Some older pensions can have a “protected retirement age” allowing earlier withdrawals but, in most cases the earliest age you can access your pension fund is currently age 55 (rising to 57 in 2028).
Be aware just because you can, does not mean you should!
Pension fraud and liberation scams are on the rise with schemes and so called “advisers” offering to release your pensions before the age of 55/57. You could end up losing all your pensions and should steer well clear!
Don’t forget the tax implications, paying too much tax can also be devastating to your financial security.
Take your Tax-Free Cash
Some clients think they should take all their tax-free cash in one go and if you have a mortgage to repay or a particular large spending need this may be sensible. However, drawing all your tax-free cash to leave some of it sitting in a low interest and taxable savings account is rarely sensible.
Some schemes can have “protected tax-free cash” meaning more than the standard 25% is available tax-free so more care is needed before making any decisions. Flexible drawdown allows you to take your cash using a “phased approach” – ie: taking your tax-free and taxable cash in “chunks” over a period of time.
Remember, all experts working at Financial Fortress offer a FREE and no obligation 1st meeting. Get in touch now!
Options for taking your retirement benefits
It is important to remember that pensions are there to provide an income in retirement. Taking too much, too quickly could exhaust your funds too soon.
Consider buying an annuity – this can provide a guaranteed income with no investment risk instead. You could use some of your pension to buy an annuity, perhaps to guarantee your “essential expenditure” for example.
Annuities are arranged either for life or a period of time (for example 10 years). There are many other features that also need to be considered such as:
- Guaranteed periods
- Spousal benefits
- Indexation
Our expert can help you decide the best strategy for you taking account of your needs, concerns, and circumstances.
What can I do with my Tax-Free Cash?
- Invest in a property
- Pay off a mortgage
- Repay debts
- Help kids with a deposit
- Holiday of a lifetime
- Build an emergency fund
Can I withdraw my money from my pension?
As long as you are old enough, have a protected retirement age or meet the qualifying conditions of ill health then generally the answer is yes. You will also need a pension scheme that allows you to withdraw in a manner you want to. If your provider doesn’t allow drawdown for example, you may need tom transfer it to a pension company that does first.
What age can I access my funds?
This is governed by UK legislation and currently the minimum age for pension withdrawal is from age 55. However, from 06th April 2028, this will increase to 57 and could rise further in the future.
Some older pensions also have what we call “protected retirement ages” and therefore could allow even earlier withdrawal, perhaps at age 50 for example. If you transfer a pension with an earlier protected retirement age you usually lose the protection and therefore care should be taken before. An expert adviser will check your plans and help you understand whether the benefits are worth giving up.
Can I cash in my pension to repay debts?
Assuming you meet the access requirements then possibly yes!
However, your pensions are a “finite” amount of money so spending them too early and in one go means you will have nothing left for later in retirement. Don’t forget, there are tax implications aswell.
Our experts will explain your options, perhaps help you draw just enough tax free cash to repay your debts and relieve any financial pressure!
What tax will I pay?
This depends on your personal circumstances and the calculations are vital to understand your position, however generally speaking with a defined contribution (money purchase) pension you can usually take up to 25% tax-free with the remaining 75% being taxable.
You could draw your tax-free cash or some taxable income and an adviser will not only complete the tax calculations but structure your withdrawals in the most effective way.
How long does it take to draw my pension?
This depends on the pension provider, the type of pension you have and whether it will actually allow you to draw your money out. A lot of older pension plans will not allow this and therefore the pension would need to be transferred first.
Once you have a scheme that will allow access, it again depends on the pension company, but typically it could take 4-6 weeks to arrange a transfer if needed and perhaps 2 weeks to arrange and receive the withdrawal.
By using an adviser, they will deal with your request as quickly as possible and as we look after millions of £’s, we can put extra pressure on your pension company to speed up the process.
Can I cash in my whole pension?
The simple answer is yes, however this does not mean you should! The tax liability on your withdrawal could be devastating! With small pensions (less than £10,000) you could use something called a “small pot encashment” or for pensions below £30,000 you could use “trivial commutation”.
Your adviser will explain the best route to use for your circumstances and make sure you don’t pay too much tax maximising the amount paid to you.
Is it better to take pension income or a lump sum?
This depends on your circumstances and what you need or want. For example, if you are still working and have sufficient income but would like to repay your mortgage, perhaps just enough lump sum using tax-free cash would be a good idea.
If you are made redundant and have no income or mortgage then a monthly income may be needed.
Our advisers will get to know you in detail, help you understand your needs fully and recommend a personalised strategy just for you!
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