You can access your pension savings as and when you like, taking however much money you want.
With flexible access to your pension pot, you could:
The following important points should be considered for Flexible Access Drawdown and Partial Pension Encashment.
There are a couple of flexible options for you to think about. They both allow you to take 25% of the money in your pension pot tax-free, but the way you do this is very different.
Option 1 • Flexible drawdown
Ted wants his 25% tax-free lump sum and then to invest the rest.
Ted is planning to help his daughter with her university costs. So he’s planning on taking 25% of his pension pot as a tax-free single lump sum. He thinks he would then like to leave the rest of his money invested, but have flexible access to it so he can take money as and when he needs it.
Ted can take the rest of his money out whenever he wants, but it will be subject to tax as he took his tax-free allowance up front. By accessing his money in this way he will reduce the maximum amount he can save into pensions.
With flexible drawdown, once you’ve taken your 25% tax-free allowance the remainder of your pension pot is held within a drawdown plan.
When it comes to taking your money out, you could arrange for a regular income, take it when you need it, or a combination of the two. There’s no limit to the amount of your pension pot you can take, but what you do draw will be subject to tax as you get your 25% tax-free allowance up front.
Once you access the remainder of your fund any future contributions that receive tax relief will be limited to the Money Purchase Annual Allowance (MPAA) – currently £4,000 a year.
When you die, you can pass what’s left in your plan to a dependant, and if you die before age 75 it will not be subject to tax.
The graph above shows how your 25% tax-free lump sum can be taken at outset and that any future withdrawals are taxable.
Option 2 • Partial Pension Encashment (PPE)
June wants the flexibility to take her money when she needs it and knows about the new legislation from April 2015.
June is thinking about finishing work and wants her pension to fund her retirement. So she wants the flexibility to take out lump sums when she needs to. She’s happy with the way her money's been invested so far and doesn't really want to change anything, however she wants to take some of her money for a well-deserved holiday.
June can take her money out whenever she wants. 25% of the slice she takes will be tax-free the rest will be subject to tax. By accessing her money in this way she will reduce the maximum amount she can save into pensions.
Change the pot size to see how it affects June's figures
Whatever you choose to do with your pension pot, 25% of what you take is tax-free. With Partial Pension Encashment (PPE) you take a portion of your tax-free allowance every time you take money, so 25% of it is tax-free and the other 75% is taxed. By only taking as much money as you need, the rest of your pension pot is left invested and can potentially continue to grow. You can also continue making payments into it, although any future contributions that receive tax relief will be limited to the Money Purchase Annual Allowance (MPAA) – currently £4,000 a year.
Each time you take a Partial Pension Encashment (PPE) you may have to make a separate application, in which case this may not be the most convenient option if you’re looking to be paid a regular income. If you die with money left in your pension pot, it will go to your dependants and may be subject to tax in certain circumstances.
The graph above shows how you can spread your 25% tax-free lump sum allowance across every withdrawal you make.
The tax treatment depends on your individual circumstances. Your circumstances and tax rules may change in the future.
It’s easier to access your money and to get regular payments from flexible income drawdown, as with a PPE you may have to apply every time you want to take any money out.
If you die, anything that’s left will go to your dependants. Depending on when you die and how the benefits are taken by your dependants there may be a tax charge.
If you take your entire 25% tax-free sum in cash and move what’s left into flexible income drawdown, your plan may not be able to accept any further contributions.
If you leave some of your tax-free allowance where it is and choose a PPE, your pension remains open so you can carry on paying into it. With both options, once you take more than your tax-free cash, any future contributions that receive tax relief will be limited to Money Purchase Annual Allowance (MPAA) – currently £4,000 a year.
Go back to the taking your money home page to look at a different stage.
Have you thought about what your plans mean for your retirement income? Our calculators can help you work it out.
Got more than one pension? Then you could think about putting them all in one place. Combining your pensions with Scottish Widows is simple and we won't charge you for this service.