Pay a pension direct from your SIPP or PP. This is known as Drawdown
Flexi Access Drawdown (FAD) is a brand new way to take retirement income from a pension. It gives you full flexibility on how much you would like to take per month, per year or ad-hoc. One of the main benefits of FAD is that you can keep your pension invested whilst drawing down income.
You can split flexi access drawdown into 2 parts:
- Tax free cash (usually 25%);
- Taxable income (usually the remaining 75%).
When you start drawdown you get the option to take 25% completely tax free. This is usually paid out to you when you commence drawdown. This is known as the Pension Commencement Lump Sum (PCLS).
After you have taken your lump sum you have the option to take as much of the remaining 75% as you’d like – but you will pay your marginal rate of tax on each income payment. If you took a large amount of taxable income in a single tax year it could push you up to a higher rate of income tax, especially if you haven’t fully retired and are still working.
Take flexible lump sums through UFPLS
Another new option for taking money out of your pension will be the ability to take flexible lump sums from all or part of your pension pot that hasn’t been used for drawdown. These will be known as Uncrystallised Funds Pension Lump Sum (UFPLS).
They will work like this…
- 25% of every flexible lump sum will be tax free; and
- You will pay your marginal rate of tax on the remaining part of your flexible lump sum.
This works differently to flexi access drawdown as each UFPLS payment has an element which is tax free (25%).
One final thing. If you buy an annuity that's it for life, but you can stop drawdown at any time and buy an annuity with the remaining fund. For example you may no longer want to live with the investment risks inherent in Drawdown, or it you may want to consider an annuity appropriate to a changing health situation.
You could also do 'half and half': take pensions at the same time partly by Drawdown and partly by buying an annuity.