PTM062730 - Member benefits: pensions: drawdown pension rules applying from 6 April 2015: flexi-access drawdown fund - where member had not designated funds in an arrangement into a drawdown pension fund before 6 April 2015
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Glossary |
Establishing a flexi-access drawdown fund
Annual allowance consequences
Flexi-access drawdown benefits
Taxation of a flexi-access drawdown pension
Establishing a flexi-access drawdown fund
Paragraphs 7, 8 and 8A Schedule 28 Finance Act 2004
A member wishing to take their pension benefits as drawdown pension must designate uncrystallised sums and assets in a money purchase arrangement as being available for drawdown pension.
Where the member is making a designation on or after 6 April 2015 and did not have an existing drawdown pension fund on 5 April 2015, they must designate the sums and assets as available for the payment of drawdown pension in a new drawdown fund, known as a flexi-access drawdown fund. The sums or assets designated for flexi-access drawdown are called 鈥榥ewly-designated funds鈥�.
When the member designates the new funds as available for flexi-access drawdown, they may choose to receive a tax-free pension commencement lump sum (see PTM063200 for more detail) of an amount equal to one third of the value of the funds that were put into the flexi-access drawdown fund. So if the member has a pension pot of 拢40,000, they could designate 拢30,000 as available for drawdown and the remaining 拢10,000 (which is one third of 拢30,000) can be taken as a tax-free pension commencement lump sum.
Annual allowance consequences
If sums or assets are designated to a flexi-access drawdown fund as available for the payment of drawdown pension, and the whole of that fund is not attributable to a disqualifying pension credit, then when the member draws down from that fund, whether in the form of income withdrawal or a short term annuity, they become subject to the money purchase annual allowance rules (unless they were already subject to those rules because flexible access had already occurred in relation to them in another scheme or arrangement).聽See PTM056500 for more detail.
Flexi-access drawdown benefits
A member can take benefits from their flexi-access drawdown fund as drawdown pension in the form of either a short-term annuity (see PTM062720) or income withdrawal.
If the member chooses income withdrawal from their flexi-access drawdown fund, they can take as much or as little from it as they like each year regardless of whether or not they have any other income or, if they do, the level of that income.
Taxation of a flexi-access drawdown pension
Section 165(2) Finance Act 2004
Section 579A Income Tax (Earnings and Pensions) Act 2003
Flexi-access drawdown pension (which includes income withdrawal and short-term annuities) is a form of pension for tax purposes and so is chargeable to income tax as pension income. The member receiving flexi-access drawdown pension is liable for income tax at their marginal rate in a tax year on whatever income they take from their flexi-access drawdown fund during that year. The scheme administrator is required to deduct income tax from the flexi-access drawdown pension under the PAYE regulations.
Example 1
Dinta has 拢40,000 in a money purchase arrangement which she wants to take benefits from through drawdown. She hasn鈥檛 previously designated any funds to a drawdown pension fund and has no other pension savings.
Dinta therefore designates 拢30,000 to a flexi-access drawdown fund. At the same time, she receives from her money purchase arrangement a tax-free lump sum of 拢10,000 (one third of the value of the funds she put into drawdown).
Dinta does not have to take any income from her flexi-access drawdown fund, but when she does she will trigger the money purchase annual allowance rules.
If Dinta takes 拢10,000 as income withdrawal from her flexi-access drawdown fund in tax year 2015-16, that 拢10,000 is taxable as pension income at Dinta鈥檚 marginal rate.
Example 2
Tom, aged 58, has pension savings in his money purchase scheme of 拢120,000. He has no other pension savings but is still employed and receives an income of 拢27,000 a year. In December 2015, he decides that he wants to put the funds into a flexi-access drawdown fund. He can have 拢30,000 paid to him as a tax-free lump sum. The remaining 拢90,000 is designated as available for the payment of drawdown pension.
In tax year 2015-16, Tom takes 拢5,000 from his flexi-access drawdown fund. His total taxable income for the year is therefore 拢32,000. As this is less than the higher rate threshold, Tom is liable to income tax at basic rate on all his income.
In tax year 2016-17, Tom takes 拢25,000 from his flexi-access drawdown fund. His total taxable income for the year is therefore 拢52,000 and he will be liable for income tax at higher rate on the amount over the higher rate threshold, and at basic rate on the amount between his personal allowance and the higher rate threshold.
The money purchase annual allowance rules were triggered on the date Tom first drew income from his flexi-access drawdown fund in 2015-16.