Income drawdown is the pension product that can pay you an income, but still give an investment return on your capital. It’s not new but in 2015 it was revamped, and resold to the public as the great new way to access your money
Flexi-access drawdown (FAD) was the new kid on the block: unlimited access to all your money, and you can take big bits or small bits – however you want it. Except it’s not quite that simple, so here’s a beginner’s guide to FAD:
Whenever you draw money out of your pension, there is a 25% tax free part available; this is the same for £1,000 or £100,000. You don’t have to take it but why wouldn’t you?
The other 75% becomes crystallised, and you can draw it as a taxable income if you want. So you can:
- Take £1,000 as £250 tax free, and £750 crystallised income;
- Take £1,000 tax free and leave £3,000 crystallised in the pension;
- Crystallise £1,000 and take it all as income, and it will all be taxed.
Option i) is a tax-efficient way to draw money out, especially if you don’t need a lump sum.
Option ii) is what those who need a lump sum up front will usually do.
Option iii) offers little or no benefit over i) so is rarely used.
What do you need to know to set up a FAD pension?
- Many pensions don’t offer this option (particularly workplace ones), so if you don’t have it you will probably need a new product to get it.
- Some pension have a tax free lump sum which is more than 25%, so you may have to transfer to a FAD after taking the lump sum, or forego the extra tax saving.
- Final salary pensions don’t offer FAD, but that is unlikely to be enough reason to transfer because there are valuable guarantees and protections to consider.
- Within the pension you need an investment: too cautious and the money could run out, too risky and the value may fall very quickly.
- You need to think about how much you take out, and when. If you take too much the money could run out; if you take it at a bad time, it may cost you more than just the income value.
- FAD is not just for Christmas – you need to review and adjust it regularly to get the best results.
Advice on such products is not cheap, and often there is a lot of work involved in agreeing the plan and setting up the product. Ongoing advice also gives reassurance the money is doing what it should. Get an expert to help you get it right.
