One of the newest options surrounding how you take money from your pension is known as Flexi-access Drawdown also referred to as FAD.
This allows you to take 25% of your pension as tax free cash and moving the remaining 75% into a new separate pension policy. At any time, you can choose to take any amount from this FAD pension to best suit when you require it as income. Withdrawals from this new pension pot are subject to tax in the same manner as any other income.
Accessing your pension in this way has a huge benefit if you still want to contribute to your retirement savings. Taking the initial 25% tax-free cash does not trigger your money purchase annual allowance (MPAA). In short, this means that you can still contribute up to £40,000 per tax year into a pension rather than the MPAA limit of £4,000 per tax year. With FAD your MPAA is only triggered once the first withdrawal is taken from the remaining 75%.
There are many areas to consider when it comes to taking retirement income. Taking your tax-free cash means that you will have to decide where to invest the FAD pension. As always, investments carry risks so it is important that you match your new invested pension with your current attitude to risk. Poor investment decisions can leave you in a situation where you don’t have enough income for retirement than you intended. Regular reviewing of how your pension is invested is key to maintaining a healthy retirement pot.
A lot of thought needs to go into how much income you need to take from your pot. The more you take out means that there is less income in the future. Many people sought help from a professional financial adviser to help them plan for future income requirements to ensure that they do not fall short of income in the future.
Flexi-access drawdown is a very flexible way of taking income but it does come with its risks and any decision to take income should be sustainable with the future in mind.