What is Pension Withdrawal AKA Flexible Drawdown?
Flexible Drawdown can be confusing, people often call it:
- Pension withdrawal
- Pension drawdown
- Income drawdown
- Flexible drawdown
- Flexi access drawdown
However, they all have the same meaning – drawing your money from a pension in an extremely flexible way that suits your’ needs. It is the opposite of the once common annuity – ie: buying an income for life – although annuities are still available.
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!
Remember, all our experts offer a FREE 1st meeting. You have nothing to lose!
How does it work?
Flexible Drawdown allows you to take money from your pension in different ways including:
- Partial tax-free cash (lump sum)
- Full tax-free cash (lump sum)
- Regular tax-free cash payments (as income)
- Regular taxable income payments
- Ad-hoc or one-off income withdrawals
- And, in any combination of these!
Meanwhile, any money not drawn out will remain invested, hopefully growing and thereby providing an even bigger pot to draw from in the future.
Normally, you cannot draw your pension until you reach the grand old age of 55 (57 from 2028).
If you die and have not spent all your pensions, any money left should be available to your family (including any spouse, unmarried partner or children for example).
Take extreme care!
For example, always check:
· Whether there are charges each time you take a withdrawal.
· If there are any limits or restrictions on how many withdrawals you can take.
A lot of older pensions will not allow any flexible drawdown and try to (ie: they suggest, imply or even force you) to buy an annuity instead!). By transfer a pension, you can then unlock flexible drawdown instead.
Remember, all our advisers are experts in drawdown and tax planning meaning you get the very best advice that you can trust every single time.
Cashing in Pensions at 55 – aka Pension Release
Very 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 other income.
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 over a number of years to minimise or even eliminate paying tax.
If you have a small pot, (ie: less than £30,000). Another route such as “small pot encashments” 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.
Remember, all clients can have a no-cost or obligation review – claim yours now!
Can I cash in my Pension before 55?
In most cases, the earliest age you can access your pension fund is age 55 and be aware just because you can, definitely doesn’t 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. You could end up losing all your pensions and should steer well clear!
Learn how it’s taxed and how it could effect your retirement
What are my options?
Cashing in your Pensions Options
- Cash in your pot in one go
- Tirivial Communtation
- Small Pot Encashment
- Choose an Annuity
- Leave the taxable income part invested
Pension Withdrawal Options
- Take 25 % tax free
- Take regular or ad hoc lumps sums
- Complete flexibility of withdrawals
- Leave remaining funds invested
- Income is paid taxable
- Mix & match!
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 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” so extreme 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 soon could exhaust your funds too soon.
Buying an Annuity – this can provide a guaranteed income with no investment risk instead.
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
Remember, at Financial Fortress your 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?
- Buy an Annuity
- Invest in a property
- Pay off your 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 meet the minimum age (currently 55) then yes you can make either partial or full withdrawals from your pension, however just because you can does not mean you should! With a defined contribution (AKA money purchase plan), the faster you draw your money the quicker it will run out so you have less to use later on in retirement. With a final salary (AKA defined benefit) pension, any income will be dramatically reduced to take account of it being paid earlier than the schemes normal retirement age. There will also be tax implications on the withdrawal potentially costing you thousands of £’s. An expert adviser will do the research for you, pointing out any negative implications to make sure you make great decisions!
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 in 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?
As long as you meet the minimum requirements (for example are at least age 55) then yes in theory you can draw your pension to pay debts or for any other use. 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 too so depending on your circumstances means you could lose most of your plan to the tax-man aswell. An expert adviser 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 take up to 25% tax-free and the remaining 75% is taxable. You can draw your tax-free sum or the income as lump sums, regular income or in any combination making it reasonably easy to manage your tax liability. An expert adviser will not only complete the tax calculations but structure your withdrawals in the most effective way – for example minimising your tax liability by recommending you draw over multiple tax years. More on tax here (PUT LINK IN)
How long does it take to draw my pension?
This depends on your existing pension provider, the type of pension you have and whether it will actually allow you to draw your money flexibly (a lot of older pension plans will not allow this and therefore would need to be transferred first). Once it is ready to allow flexible drawdown, it then depends on the pension company in question but typically it could take 4-6 weeks to arrange a transfer if needed and perhaps 2 weeks to arrange and receive the withdrawal. An expert adviser will complete your requests 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”. Whatever you are planning, an expert 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 very much 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 decent monthly income may be needed. An expert adviser 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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