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Could flexible income be right for you?

Choosing flexible income – also known as ‘income drawdown’ – from the pension freedoms gives you total freedom to take the income you want from your pension savings, but also total responsibility for managing it.

Depending on what your pension provider offers, you may need to move your pension savings to a ‘flexi-access drawdown’ arrangement (also known as a ‘drawdown pension’), a financial product offered by lots of providers. Your pension savings are invested in the drawdown arrangement and you take your flexible income in a way that works for you. You need to be careful not to take too much, too early, or you could run out of money.


Now, let’s take a good look at flexible income

Good things about flexible income

  • 1. Total flexibility

    In theory, there are no limits on the amount you can take out or when you can take it (once you’re over the minimum age for taking benefits, currently 55) so you can manage your income in a way that suits your needs. For example, you could take more income in a year when you have a large one-off expense. If you don’t usually need that much to maintain your standard of living, you can take smaller amounts of income in other years.

  • 2. Inheritance
    Any money left in your drawdown pension when you die could go to your beneficiaries. If you die before you’re 75, any money your beneficiaries receive will be completely tax-free. If you’re over 75, they’ll pay tax at their own income tax rate, whether they take it all at once or as an income. In fact, money in a drawdown pension can be passed down generations, providing income for your descendants without triggering their money purchase annual allowance (see ‘Take care with tax allowances’ below).
  • 3. Manage tax

    The flexible income you take is taxable in the same way as any other income. But you can be tax-efficient with your money by paying attention to the following things.

    • Your personal income tax allowance (the amount you can earn in a tax year before you start to pay income tax). The standard allowance is currently £12,570 a year.
    • The tax year you’re taking money in. The tax year is 6 April to 5 April. For example, if you take out less money in a tax year than you did the previous tax year, you may pay less income tax.
    • You can normally take up to a quarter of your pension pot as tax-free cash before putting the rest into your drawdown arrangement to use for flexible income, although this will leave you less to use for future income. Or, you could opt for ‘phased’ drawdown, where you get some of your tax-free cash with each chunk of taxable income you take.
  • 4. Changeable in the future

    You don’t have to stick with flexible income for the rest of your life. At a later date, you could buy a guaranteed income (annuity) for example.

  • 5. Potential to keep growing

    Although you’re taking income out, the rest of your money will stay invested in your drawdown pension, so it could continue to grow through future investment returns. This isn’t guaranteed, though. Investments can fall in value as well as rise, so whether your drawdown pension grows in the future depends on how your investments perform as well as the amount of money you take out.

Not-so-good things about flexible income

  • 1. Total responsibility
    With flexible income, things like how much money to take out and when, and how to be tax-efficient with your money, are your responsibility. Could you make those decisions without any help or guidance? You’ll also need to decide which provider to choose for your flexible income. There can be big differences between pension providers’ offerings including charges, how flexible their products are and what investment options they offer. Could you tell which would be the best value? We can help.
  • 2. Investment risk
    You’ll have to choose your own investments and take the risk they could fall in value, which could leave you with less income than you’d thought.
  • 3. The risk of running out
    Flexible income is not guaranteed for the rest of your life. You could run out of money altogether. It’s important to make a plan so your income is sustainable over your lifetime. We can help you with this.
  • 4. May not be suitable for small amounts of pension savings
    Flexible income may not be suitable if you only have a small amount of pension savings (as it could use them up quickly and leave you with nothing) or if it will be your only source of income (as again, you’d be at risk from running out of money). We can help you decide if it’s a good option for you.
  • 5. State benefits and debts
    Taking money out of your pension savings can affect your eligibility for income-related benefits like Universal Credit, as your income is taken into account when working out your benefits. Also, if you have debts, your creditors can get at any money you take out of your pension savings.

Take care with tax allowances

If you’re thinking of taking some of your retirement savings while you’re still saving into a defined contribution pension, you could lose tax relief on future retirement savings.

When you’re saving into a pension you benefit from tax relief, as long as:

  • your own contributions (to all your pensions) are less than 100% of your salary, and
  • total contributions (again, to all your pensions) are within the annual allowance – currently £60,000 a year for most people.

This allowance includes your and your employer’s contributions to your pension pot, and your contributions to any personal or stakeholder pensions you have outside work.

However - if you start taking your retirement benefits and still want to carry on saving for retirement, this allowance could fall to £10,000 a year (known as the money purchase annual allowance). The money purchase annual allowance usually applies if you take cash, other than tax-free cash, start taking flexible income, or buy a fixed-term annuity. 

But first... a warning

Has someone made you a tempting offer about your pension? They could be a pension scammer. Check who you’re dealing with. Are they on the Financial Conduct Authority (FCA) register of regulated companies – or the FCA warning list of known scammers?

Visit ScamSmart

We can help you maximise your potential

Pension Potential offers expert guidance and lots of support to help you understand more about your retirement options.

We don’t offer financial advice through Pension Potential. But, if you decide you need financial advice, we can refer you to our expert financial planners who offer this service.


Guidance is intended to help you understand your retirement options. It won’t make specific recommendations or tell you what you should do.

  • Personal insight gives you a personalised overview of the options available to you, but won’t recommend which option would be best for you.
  • Tailored insight enables you to use our annuity finder to search the market and buy an annuity. Any fees will be paid by commission from the annuity provider.
  • Expert insight offers the option of talking to an expert who will give you help and guidance, but won’t be able to recommend specific options unless you decide to take, and pay for, financial advice. They can discuss this with you.

Financial advice

Financial advice is a regulated professional service that will take your situation into account and make recommendations for options and products.

You may need financial advice if you’re interested in more complicated retirement options such as flexible income (drawdown), or mixing two or more retirement options.

You’ll need to pay for financial advice. We offer financial advice from highly-qualified chartered financial planners, with competitive charges.

Download our financial planning guide


We’ll always tell you in advance if there’s a charge for any guidance or advice you take from us.

Getting the best value for your retirement income

Here at Pension Potential, we’re experts on the pension freedoms. We have access to all the leading retirement providers, but no ties to any of them – so we can be impartial about comparing different providers’ rates and charges. We can help you find the best value for flexible income, or any of the other pension freedoms.
Ask for a free, no-obligation Pension Potential pack showing your personalised options for taking your pension savings.
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  • Personal insight

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  • Tailored insight

    If guaranteed income (annuity) appeals to you, use the Pension Potential annuity finder to shop around for your own tailored annuity.
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