RPSM09103590 - Technical pages: member benefits: drawdown pension: flexible drawdown pensions

This guidance has been written from the members’ perspective.

What is flexible drawdown?
What is the difference between flexible drawdown and capped drawdown?
Must a scheme offer flexible drawdown?
How do I qualify to take my pension as flexible drawdown?
Can I make pension contributions when I am in flexible drawdown?
What happens if I make a pension contribution in another other money purchase scheme in the tax year in which I make a declaration?
I want to take/have taken flexible drawdown what effect could automatic or auto-enrolment have on me?
Should I take flexible drawdown?
Can I go straight into flexible drawdown?
Can I switch from capped drawdown to flexible drawdown?
Can I switch from flexible drawdown to capped drawdown?
Can I take out all my funds in one go under flexible drawdown?
Can I choose how much and when to take payments under flexible drawdown?
Can my scheme set limits on the amount of money I can withdraw under flexible drawdown?
Can I take flexible drawdown more than once under the same scheme?
What happens if I put (designate) extra funds into my flexible drawdown pension fund?
If I have flexible drawdown does my scheme need to do regular reviews of the amount I can take as drawdown pension?
Does my scheme administrator have to provide me with an annual report of the amount of LTA used up once I have taken all my funds under flexible drawdown
Can I purchase a lifetime annuity from my flexible drawdown pension fund?
Can I purchase a short-term annuity from my flexible drawdown pension fund?
I have a flexible drawdown pension fund; can I also draw a scheme pension from that fund?

What is flexible drawdown?

[Paragraph 14A(1) Schedule 28] 

Flexible drawdown is a form of ‘income withdrawal’ where your pension is paid direct from your pension scheme. There is no limit on the amount that your pension scheme can pay you in any year. You can take as much or as little as you like. If you want to, you can take out all the funds in your arrangement as one payment. All payments of flexible drawdown are taxed under PAYE.

There is another type of ‘income withdrawal’ drawdown pension called capped drawdown.

Top of page

What is the difference between flexible drawdown and capped drawdown?

[Paragraphs 7 and 14(A) (1) Schedule 28] 

Both flexible drawdown and capped drawdown are a form of ‘income withdrawal’. Both types of drawdown pension are taxed as pension income.

With flexible drawdown there is no limit on the amount of drawdown pension you can take each year. You can take as much or as little as you like. There is also no need for your pension fund to be reviewed to work out your maximum possible pension. However not everyone can take flexible drawdown. In particular you must be getting a minimum amount of secure pension income (£20,000) every year to qualify for flexible drawdown.

With capped drawdown there is a limit on the amount of pension you can take from your scheme each year. This limit is regularly reviewed by your pension scheme. Under the tax rules anyone who has benefits in a money purchase arrangement can use capped drawdown. However not all schemes offer this option.

Top of page

Must a scheme offer flexible drawdown?

No. The tax rules allow registered pension schemes to offer flexible drawdown but it does not require them to do so.

Top of page

How do I qualify to take my pension as flexible drawdown?

[Paragraph 14A Schedule 28, Section 165(3A)][The Registered Pension Schemes (Relevant Income) Regulations - Statutory Instrument - SI 2011/1783]

If your scheme offers this facility you can take your pension as flexible drawdown if you meet the flexible drawdown conditions. These are

  • you must have pensions in payment from other sources of at least £20,000 (called the minimum income requirement) payable in the tax year in which you make your flexible drawdown declaration. In other words, it is the amount of pension received that counts not the annual rate of your pension, so you must actually be due to receive at least £20,000 pension income in the declaration year.
  • for example, you start your pension on 1st December 2011. Your annual pension is £36,000 payable in arrear in equal monthly instalments. So you will receive £12,000 pension in tax year. 2011-12. This pension alone will not allow you to meet the minimum income requirement for that year. However you will meet it the following year.
  • you must have received at least one payment from each pension in payment for it to be included in meeting the minimum income requirement
  • you cannot be building up benefits under any defined benefit or cash balance arrangements held under a registered pension scheme when you make your declaration (i.e. you must have ceased to be an active member. Note - you will still be classed as an active member if your benefits continue to be linked to your current salary even though no additional service related benefit is accruing),
  • you cannot have made any contributions to an other money purchase arrangement held under a registered pension scheme in the tax year that you go into flexible drawdown. Also no one else should have made contributions to your other money purchase arrangements in that tax year, and
  • you must give your scheme administrator a declaration, which they accept, that contains information set by HMRC.

Top of page

Can I make pension contributions when I am in flexible drawdown?

[Section 165 (3B)] 

To qualify for flexible drawdown you

  • must stop building up benefits under any registered pension scheme in which you have benefits of a defined benefits or cash balance nature. In other words you must have ceased to be an active member at the time you make the declaration and
  • cannot make any contributions to an other money purchase arrangement under any registered pension scheme in the tax year you go into flexible drawdown. Neither can your employer or any one else pay contributions to your other money purchase arrangement during the tax year.

However this does not stop you starting to make contributions or resuming active membership in future tax years. However if you do this your whole contribution will be liable to the annual allowance charge. If your employer, or anyone else, contributes to an other money purchase arrangement for you, you will also be liable to the annual allowance charge on these contributions. Payment of any contracted-out payments from HMRC do not count as contributions for this purpose.

You will also be liable to the annual allowance charge if you start building up benefits again (become an active member) under a defined benefits or cash balance arrangement.

Subject to the normal rules for relievable contributions, any contributions paid will be tax relievable but this tax saving will be counter-balanced by the annual allowance charge.

Top of page

What happens if I make a pension contribution in another other money purchase scheme in the tax year in which I make a declaration?

[Section 165 (3B)]

You cannot make a declaration until the tax year in which no contributions have been made.

Top of page

I want to take/have taken flexible drawdown what effect could automatic or auto-enrolment have on me?

Some employers automatically put their employees into their pension scheme. From October 2012 under the provisions of Pensions Act 2008 some employers will be subject to the automatic enrolment duty and will be required to automatically enrol their employees into a pension scheme. If you have taken flexible drawdown and this happens to you, it may have an impact on you as explained below.

Two of the conditions you have to meet to take flexible drawdown are that

  • you cannot be building up benefits under any defined benefit or cash balance arrangements held under a registered pension scheme when you make your declaration (i.e. you must have ceased to be an active member. Note - you will still be classed as an active member if your benefits continue to be linked to your current salary even though no additional service related benefit is accruing),
  • you cannot have made any contributions to an other money purchase arrangement held under a registered pension scheme in the tax year that you go into flexible drawdown. Also no one else should have made contributions to your other money purchase arrangements in that tax year,

However this does not stop you starting to make contributions or resuming active membership in future tax years. However if you do this your whole contribution will be liable to the annual allowance charge. If your employer, or anyone else, contributes to an other money purchase arrangement for you, you will also be liable to the annual allowance charge on these contributions. Payment of any contracted-out payments from HMRC do not count as contributions for this purpose.

You will also be liable to the annual allowance charge if you start building up benefits again (become an active member) under a defined benefits or cash balance arrangement.

Subject to the normal rules for relievable contributions, any contributions paid will be tax relievable but this tax saving will be counter-balanced by the annual allowance charge.

Top of page

Pensions Act 2008 provisions for automatic enrolment

If an employer is subject to the automatic enrolment duty and automatically enrols an employee into a new pension scheme under the provisions of Pensions Act 2008, the employee will have one month from the enrolment date to opt out of the new scheme. If they opt out within that one month period then the law treats them as if they were never a member of the pension scheme and in law any monies paid into the scheme by the member or their employer will not be contributions and are refunded. So if you are subject to automatic enrolment by your employer under the Pensions Act 2008 provisions and opt out within one month you can still meet the flexible drawdown conditions. If you do not opt out in time then you will not be able to meet the flexible drawdown conditions mentioned above. The employer will have a duty to automatically enrol those who have opted out every three years, so you may need to opt out within one month each time this happens.

If you change employer and your new employer is subject to the automatic enrolment duty under Pensions Act 2008, they will be required to automatically enrol you into their pension scheme. If you wish to make a flexible drawdown declaration in the tax year of enrolment or if you have already entered flexible drawdown and wish to avoid any potential annual allowance charges, you will need to opt out of your new employer's pension scheme when you are automatically enrolled

Top of page

Auto enrolment that is not under Pensions Act 2008 provisions

If an employer auto enrols its employees into their pension scheme and this is NOT under the Pensions Act 2008 provisions then if this happens to you in the tax year you wish to make a flexible drawdown declaration or at any time if you have already made a valid declaration, you may not be able to avoid the consequences mentioned above by opting out of the scheme.

If you are enrolled into ayou have cancelled the pension contract relating to the scheme under the FCA cancellation rules (with the result that the contract is therefore treated as void ab initio), there will have been no contributions made that would affect your ability to meet the flexible drawdown declaration conditions.

In any other circumstances, if you wish to take/have taken flexible drawdown and you change employment, you will need to speak to your employer or prospective employer at an early stage to avoid being enrolled at all. Your employer will be able to tell you how you can do this.

Top of page

Should I take flexible drawdown?

This is up to you and is not a matter for HMRC to advise on. You should seek independent financial advice if you feel that you require professional guidance.

Top of page

Can I go straight into flexible drawdown?

[Paragraph 14 Schedule 28]

Yes. You can do this if you give your scheme administrator the required declaration when you designate benefits to provide drawdown pension.

Top of page

Can I switch from capped drawdown to flexible drawdown?

[Schedule 165 (3B)]

Yes, if you meet the conditions for flexible drawdown you can change from capped to flexible drawdown.

Top of page

Can I switch from flexible drawdown to capped drawdown?

[Schedule 165 (3B)]

No - the test on whether or not you qualify for flexible drawdown is only at the start of flexible drawdown. The decision to move to flexible drawdown is irrevocable under the tax rules and you can’t lose the ability to take drawdown pension using flexible drawdown. Once you are in flexible drawdown it is for you and your scheme administrator to decide how much you take out and how often. The amounts drawn under flexible drawdown may be similar to or different from the amounts allowed under capped drawdown. However, there are tax consequences if you subsequently make contributions to or resume active membership of any registered pension schemes after taking flexible drawdown.,

Top of page

Can I take out all my funds in one go under flexible drawdown?

[Schedule 165(3B)]

Yes, as long as your pension scheme allows this.

Top of page

Can I choose how much and when to take payments under flexible drawdown?

[Paragraph 10 Schedule 28]

Yes. This of course will depend on what your pension scheme allows.

Top of page

Can my scheme set limits on the amount of money I can withdraw under flexible drawdown?

[Paragraph 10 Schedule 28]

The tax rules do not set any limit on the amount you can be paid under flexible drawdown. However your scheme can choose to set limits on the amount it will pay at any one time.

Top of page

Can I take flexible drawdown more than once under the same scheme?

[Para 10 Sch28]

Yes. You can arrange your affairs so that you designate funds into drawdown pension at different times. This can be done under the same arrangement or using different arrangements under the same scheme.

Top of page

What happens if I put (designate) extra funds into my flexible drawdown pension fund?

[Paragraph 10 Schedule 28]

As there is no limit on the amount you can take from your flexible drawdown pension fund your scheme administrator does not need to carry out any maximum drawdown pension calculations.

If you are under 75 this designation of extra funds to provide a drawdown pension will trigger a test against the lifetime allowance. Guidance on this process can be found at RPSM11104050.

Top of page

If I have flexible drawdown does my scheme need to do regular reviews of the amount I can take as drawdown pension?

[Paragraph 10 Schedule 28]

No

Top of page

Does my scheme administrator have to provide me with an annual report of the amount of LTA used up once I have taken all my funds under flexible drawdown

[Paragraph 10 Schedule 28]

No.

Top of page

Can I purchase a lifetime annuity from my flexible drawdown pension fund?

[Paragraph 10 Schedule 28]

Yes, you can use all or part of your flexible drawdown pension fund to buy a lifetime annuity. If you are under 75 the purchase of the lifetime annuity will trigger a test of your benefits against your lifetime allowance. Guidance on how this lifetime allowance test works can be at RPSM11104540.

Top of page

Can I purchase a short-term annuity from my flexible drawdown pension fund?

Yes, you can use all or part of your flexible drawdown pension fund to buy a short-term annuity. With flexible drawdown there is no limit on the amount that you can take at any one time. So your scheme will not have to consider how much you are being paid from your short-term annuity when making payments direct to you from your drawdown pension fund.

Top of page

I have a flexible drawdown pension fund; can I also draw a scheme pension from that fund?

[Paragraph 10 Schedule 28]

Yes, you can use all or part of your flexible drawdown pension fund to provide a scheme pension. If you are under 75 the provision of a scheme pension will trigger a test of your benefits against your lifetime allowance. Guidance on how this lifetime allowance test works can be found at RPSM11104270.


  Glossary (RPSM20000000)