Pension Drawdown-Flexi Access Drawdown (FAD)
Flexi Access Drawdown has been available since 2015 and in our opinion spearheaded a shift towards a climate of more positive client attitudes towards pensions at large, from one that was (and in some cases still is) quite negative. As mentioned on some of the other pages, we like pensions and flexi access drawdown has definitely made them more likeable!
Most modern pensions allow the existing scheme to be moved into FAD (sometimes known as crystallisation) and if you are in a scheme which does not allow this then you will have options to move it to a scheme which does allow this form of withdrawing an income. In simple terms FAD allows you to withdraw up to 25% as tax free cash and to also withdraw an income in exactly the manner which is suitable for your specific circumstances and differs greatly from the older fashioned/more traditional route of taking an income from a pension by purchasing an annuity (see the annuity section of our website for more information on this withdrawal/decumulation method, which is still available and is sometimes still appropriate depending upon the specific circumstances).
Many of our existing clients are already in FAD, either coming to us whilst building up their pension (the accumulation stage) and moving into FAD (the decumulation phase) with Accudo as their adviser or indeed coming to us at the point of navigating the range of options available at the point of wanting to withdraw an income from their pension(s).
Prior to Pension Freedoms introduced in 2015, one of the main criticisms in the industry and by the public was that once an annuity was purchased from an insurance provider, this would ultimately be lost on death (albeit spouse guarantees and 5 or 10 year full guarantees could, and still can be built in). This meant that you were gambling on whether you or the insurance company would benefit from the purchase of an annuity and if you were unlucky you could die in the early years of retirement having only had back a small amount of the money you had saved all throughout retirement. Put simply, most people were not a fan of this and pensions were not that popular! With FAD this is not the case, your pension fund does not need to be exchanged for an annuity at any point and on death any remaining fund can be passed to your spouse (assuming you pre-decease them) and on the death of the spouse it can be passed to your children or any other beneficiaries you see fit. (Please note that there are options to beneficiaries for example lump sum payments, continuing in FAD, purchasing an annuity and each have their own tax consequences and also the income tax treatment differs depending upon whether death occurs pre or post 75).
Despite the fact that some form of income tax is likely to apply, pensions can now be passed onto a spouse and then further down the generations in the form of a legacy pension, this fact coupled with the generous tax relief during the accumulation phase, as well as the fact that pensions are outside of the estate for inheritance tax purposes (and therefore not liable to inheritance tax except in exceptional circumstances), has led to pensions largely being seen as one of the most tax efficient methods of saving and investing.
If we manage a FAD account for you, we will do so according to our investment philosophy. The level of service applied will largely depend upon the size of your portfolio. if you would like to find out more about this, then we recommend reading the investment philosophy and ongoing portfolio management pages of our website. (There is also further information regarding past performance and fees contained within these pages which relate to FAD in the same way as Accudo managing any other investment portfolio, except to say that clearly the level of withdrawals will affect performance potential and we can discuss this further with you).
With regard to managing a FAD portfolio, this will be classed as an income portfolio and therefore the range of investments offered will have slightly more focus on yield than our growth portfolios and may hold more cash to meet withdrawals dependent upon your circumstances.
We have tried to describe FAD in a nutshell above, however a slightly more complicated version is available known as Staged FAD. This strategy is normally deployed for clients who have no need for a large chunk of tax free cash in one go (for instance their mortgage is often fully paid off and they already have a safety net in the form of cash reserves). In this instance it may be beneficial to take tax free cash in stages over a number of years. We will give you a case study example below to help you understand this:
Mr Parker aged 56
Combined Pension Plans for Mr John Parker £800,000 and none for Mrs Parker
Home worth £600,000 with no mortgage
Savings Account worth £50,000 and a Current Account worth £5,000
Income needed per annum £30,000 NET
One potential strategy would be to crystallise 1/10th of the pension each year over the next 10 years until state pension age, to take tranches of tax free cash, thus the anticipated income streams would be as follows:
Year 1-10 (assuming zero growth in the fund and zero growth in the personal allowance band*)
£20,000 tax free cash (i.e. 25% of £80,000 being one 10th of the fund crystallised)
£10,000 withdrawn as income and received tax free as this is within the personal allowance
Total Net Income £30,000
(withdrawal percentage 3.75%)
Year 10 onwards
At this point the state pension would commence for John of approximately £8,500 in today’s terms. Assuming the income requirement is still £30,000 net in today’s terms, this means a further £21,500 Net (£25,000 Gross assuming the personal allowance is still £12,500 in today’s terms and John is a basic rate tax payer) would need to be withdrawn as income (as all of the tax free cash would have been taken).
(withdrawal percentage 3.13%)
One of the main advantages of staged tax free cash is that it can allow the amount withdrawn in the early years to be less than it would otherwise need to be in order to meet expenditure needs and this in turn puts less pressure on the overall fund.
*Please note we have assumed no growth of the fund, no inflation proofing of income and no increase of the personal allowance in line with CPI, in order to keep this example relatively simple and understandable. In reality it is likely that all of these would apply and it has been assumed that growth of the fund over the withdrawal percentages is achieved in order to allow for an income rising with CPI.
Accudo Investments Ltd use Select a Pension cashflow modelling software to help clients plan the most appropriate withdrawal strategy to meet their expenditure needs and tax situation whilst ensuring the risk of fund depletion is kept to a minimum.