Flexible income (drawdown)

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.

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).

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.

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.

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.

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.

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.

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.

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.

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.