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Flexi-access drawdown (FAD)
• All new drawdown plans taken out from 6 April 2015 will be flexi-access drawdown (FAD).
• There won’t be any limits on income levels.
• There won’t be any minimum secure pension income requirement.
• The member can take 25% tax free cash from their drawdown fund, subject to having available lifetime allowance (LTA).
• The balance of the fund can remain invested. It can be paid as a taxable lump sum. It can be used to provide taxable flexible income. Or any combination is possible.
• Once the member takes any income, the £10,000 money purchase annual allowance (MPAA) applies.
• All pre April 2015 flexible drawdown arrangements automatically become FAD.
Example
Ted has a personal pension valued at £200,000. He has no other sources of taxable income in 2015/2016. He has a number of options if he wishes to use FAD.
He could crystallise the whole fund via FAD then take £200,000 as a lump sum. However, this isn’t particularly tax efficient. He’ll receive 25% or £50,000 as tax free cash and the balance of £150,000 will be taxed as income. The £10,600 personal allowance reduces by £1 for every £2 of income over £100,000, to a minimum of nil. Therefore, Ted gets a nil personal allowance. As a result he receives:
25% tax free cash - £50,000
Taxable lump sum - £150,000
£200,000
Income tax: £31,785 x 20% (£6,357)
£118,215 x 40% (£47,286) (£53,643)
Net amount £146,357
£53,643 / £150,000 x 100 = 35.76% tax paid.
If he does want to rebuild his pension fund, he’s caught by the MPAA.
Ted could also use FAD to take his full tax free cash immediately and a tax efficient income as needed. He’d receive £50,000 tax free and could leave the remaining £150,000 invested in a tax advantaged pension environment. If he needs further income in 2015/2016, he could withdraw up to £10,600 without any income tax liability. In future years, provided he has no other taxable income, he could withdraw up to the amount of his personal allowance without triggering a tax liability. Ted needs to consider whether his withdrawals are sustainable.
Another option is for Ted to crystallise just some funds via FAD. He might designate £50,000 of his fund. He could take £12,500 tax free cash and leave the balance invested - £37,500 crystallised and £150,000 uncrystallised. He could access additional tax free cash by crystallising further tranches. At no point would the legislation require him to take an income from the crystallised fund.
With both these options, so long as Ted takes just tax free cash, he keeps the full £40,000 annual allowance and carry forward. This only changes once he actually withdraws any income. Many people will take a flexible approach to retirement, with periods of part-time employment or consultancy work. So this gives scope for further pension funding after starting to take money purchase benefits.
Capped drawdown
• No new capped drawdown arrangements can be set up post April 2015.
