Flexi-access drawdown (FAD) lets you take out up to 25% of your pension savings as a tax free lump sum, sometimes called the pension commencement lump sum (PCLS). The rest of your pension savings would then be moved to a drawdown plan which would allow you to withdraw the rest of your pension savings as and when you like, but you’ll pay tax on these withdrawals if your total income in a year exceeds your £11,0001 personal tax allowance. Income can include any salary, State Pension, or income from savings, investments or share dividends. With some pension providers, you will need to take out a fixed amount each year whereas other providers may give you more flexibility. If you took out less than the 25% tax free amount at the outset, you would not be able to receive any further tax free amounts.
A UFPLS lets you draw an income from your pension savings but, rather than moving your pension savings to another plan, the money remains invested in the existing policy. With this type of pension, you don’t take the full 25% tax free lump sum at the start. Instead, every time you take money from your pension, 25% will be tax free and 75% will be taxed at your marginal rate.
What are the benefits?
- You can take out money when you want, to suit your needs, although with some providers you may need to take a fixed amount each year.
- If you die before your 75th birthday, anything left in your pension fund will be passed on to your nominated beneficiary tax free. If you die aged 75 or over, from April 2015 your nominated beneficiary can continue to make regular withdrawals from your pension savings, paying tax at their highest rate. Or, they can take it all as a lump sum, but this will be taxed at your marginal rate.
- Both FAD and UFPLS give you the opportunity to turn your pension savings into an annuity at a later date.
- See HM Revenue and Customs income tax rates and allowances