What is flexi-access drawdown? The pension bank account explained
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One of the big announcements in the Budget was the opening up of income drawdown as a mainstream product. For the first time, it will be available to everyone, regardless of the size of their pension fund. To prepare for this, there have been some changes to the rules around drawdown.
The main income drawdown product currently is capped drawdown. This places limits on the income that can be taken each year, and the annual allowance (contributions that can be made to the pension and receive tax relief) is £40,000.
From 6 April 2015, all new drawdown plans will be flexi-access. Capped drawdown will no longer be available for new customers, although existing members will remain in a capped drawdown plan provided their withdrawals do not exceed the limits.
Here is our rundown of flexi-access drawdown:
- All new income drawdown plans will be flexi-access from April 2015
- Annual allowance will be £10,000 and any contributions above this will not receive tax relief
- A 25% tax-free lump sum is available, which can be taken upfront or 25% of each withdrawal will be tax free, with the remainder taxed at your marginal rate
- There will be no minimum income requirement to enter a flexi-access plan
- Flexi-access can be used to provide a steady income or ad-hoc sums can be withdrawn
- There is no limit on the amount that can be withdrawn, but a marginal rate of tax is applied to 75% of the fund; if you withdrew £100,000, £75,000 would be subject to tax and the sum would be sufficient to have the higher rate applied
- Members of a flexi-access plan can choose to buy an annuity with their fund at any time
What if I'm already in capped drawdown?
- Capped drawdown members will see no changes if their withdrawals are within the income limits set by the government
- They will continue to have a £40,000 annual allowance
- If they exceed the limits they will automatically be put into a flexi-access plan, and the annual allowance will drop to £10,000
Flexi-access drawdown will probably be an appealing option for many, but it's important to remember that drawdown is not the most suitable option for everyone and there's a risk of depleting your fund too early. All withdrawals are treated as taxable income, so it is possible to be put into a higher tax bracket, especially if you have other income including the State Pension. Tax treatment depends on each client's individual circumstances and may be subject to change in the future.
If you are considering income drawdown and want to know more about it, including whether it is a suitable product for you, you can call us on 01634 733 163 or fill in the form on the right.
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The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section: https://www.portafina.co.uk/whats-new
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