At a glance, Flexible-Access Drawdowns appear to be one of the simplest retirement finance products, particularly when compared to the more rigid products, such as annuities or capped drawdowns.
Flexible-Access Drawdown allows retirees to take out as much, or as little, as they would like from their pension pot, while leaving the remainder invested in their pension scheme to (hopefully) grow in value. They enable retirees to continue to build up benefits from other pension arrangements, such as defined benefit or defined contribution schemes.
What’s more, Flexible-Access Drawdowns enable savers to withdraw a 25% tax-free lump sum from their pension pot as soon as they reached the age of 55.
However, this does not mean that a Flexible Drawdown is the perfect retirement finance option for everyone…
Points to consider
As is the case with all investments, there is a level of risk associated with a Flexible-Access Drawdown. Leaving one’s pension pot invested will mean that its value will rise and fall in reaction to market changes.
Many retirees will accept these investment-related risks. However, there remain additional rules, which could complicate retirement strategies.
For example, there is a lesser-known rule surrounding the 25% a person can withdraw as a tax-free lump sum. Many retirees withdraw this sum as soon as they reach the age of 55; others choose to wait. However, with some Flexible-Access Drawdown plans, there are time restrictions, which mean that individuals would lose the opportunity to withdraw their 25% if they wait too long.
Additionally, when a saver chooses to withdraw income, it will be subject to tax at the individual’s marginal rate of income tax. This rate is dependent on how much someone decides to withdraw; for example, withdrawing large amounts in one go could result in a larger tax bill.
It is also important to note that pension providers are not compelled to offer Flexible-Access Drawdowns as a retirement finance option. So, finding a provider that does offer this option will require research, and understanding exactly what their retirement needs are.
The value of advice
Entering into a Flexible-Access Drawdown plan not only requires a pension planner to research various providers, but they must also have a strategy for when they plan to withdraw funds. This strategy ought to be tax efficient as well as offering the individual a comfortable retirement.
Consequently, it is absolutely vital that savers seek independent financial advice before making a final decision. Advisers are able to assess an individual’s current financial situation and help them to develop a tailored retirement plan suited to their needs.