Phased Flexible Access Drawdown

Published / Last Updated on 06/07/2021

Since 6th April 2015 we have all been able to take advantage of flexible access drawdown where there is no limit to the amount you draw from your pension. 

You can choose to transfer your pension fund to another provider (or remain with your existing provider) and utilise an unsecured pension, using full flexible access drawdown. 

You would take any tax-free cash (pension commencement lump sum) at the outset and then income (if you need it) without any restriction on the amount you can take and when. 

If you want to, you can take the whole pension fund out in one go.  Only 25% would be tax free and the balance would be taxable as income in the tax year it was drawn. 

If you have taken out all the tax-free cash lump sum, then all pension money will be treated as ‘crystallised’ benefits. 

If death occurs after age 75 and a lump sum is paid out to a beneficiary, all money drawn by the beneficiary will be taxed at their marginal rate.  If the beneficiary continues with drawdown, then tax is also payable at their own marginal rate.

You are still able to make ongoing pension contributions whilst using flexi access drawdown.  That said, once you have triggered flexible access to the taxable part of the pension fund i.e.  the non-tax-free cash (crystallised) element you are then restricted by the Money Purchase Annual Allowance (MPAA) in the maximum new pension contribution amounts that can be paid into an investment linked pension on your behalf (by you or your employer) of just £4,000 pa gross in total.

Phased Flexible Drawdown

Phased flexible drawdown works on the same principle as Phased Retirement Annuities and Phased Capped Drawdown.  It delivers this by dividing the pension fund into a number of identical policies within the plan.  Imagine your pension plan is divided say into e.g.100 mini pension pots.

Phased flexible drawdown provides an alternative means of obtaining income by encashing a required number of policies in stages e.g.  encash 10 of your 100 pots to utilise the 25% tax free cash from those 10 pots only and then drawing down a flexible income from those 10 ‘crystalised’ funds.   The remaining 90 pots remain investing in full until you are ready to increase tax free cash taken and/or higher drawdown income amounts in the future e.g.  on an annual basis. 

This gives you the facility of varying future income and tax-free cash levels to fit in with your overall financial plan and circumstances.  Only the part of your pension fund moved into the capped drawdown pot will be treated as crystallised benefits.

Using Phased Flexible Drawdown Tax Efficiently

The personal tax allowance is currently (tax year 2021/22) is £12,570.

Now, divide the personal allowance £12,750 by 3 = £4,190.  Then, multiply £4,190 X 4 = £16,760.

If you convert £16,760 of your unused/uncrystalised mini-pension pots to flexible drawdown.

25% of £16,760 is £4,190 Tax Free Lump Sum and the balance of £12,570 crystalised funds is taxable but as it is within your personal allowance £12,570 there is no tax to pay.

This means in tax year 2021/22, if you have no other taxable income, you could withdraw a total of £16,760 without paying taxes.  If your partner does the same, that is £33,520 pa tax free income.

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