This guide is for financial advisers only. It mustn’t be distributed to, or relied on by, customers. It is based on our understanding of legislation as at May 2023.
Drawdown has taken many forms since it was first introduced in 1995. Most recently, from 6 April 2015, the concept of ‘flexi-access drawdown’ was introduced as part of the pension flexibility changes. This article explains the flexi-access drawdown rules and the impact on those with funds in capped or flexible drawdown prior to 6 April 2015.
Flexi-access drawdown was introduced as an option from 6 April 2015. A member can choose to go into flexi-access drawdown from the age of 55 (or earlier, if a lower protected pension age applies or if the ill health conditions are met) as an alternative to purchasing an annuity or taking an Uncrystallised Funds Pension Lump Sum (UFPLS). The options available in practice will depend on scheme rules.
It’s possible to take a tax-free lump sum (usually up to 25% or higher where lump sum protection applies) with the balance going into flexi-access drawdown. Any income taken is taxed at an individual’s marginal rate. Withdrawals of any amount up to the full fund can be taken at any time from a flexi-access drawdown fund so no GAD limits or regular income limit reviews apply (see our Capped drawdown article for further information about income limits).
A money-purchase annual allowance (MPAA) is triggered when a person takes the first flexi-access drawdown income payment from their drawdown fund, (where they have gone into flexi-access drawdown after 5 April 2015 from a capped drawdown fund or from an uncrystallised fund). If a person takes a tax-free lump sum and no income, this doesn’t trigger the MPAA. You can find out more about the MPAA in our Annual Allowance guide.
Flexi-access drawdown is an option available when someone takes pension benefits from a money purchase arrangement. Anyone with rights in a defined benefit scheme who wants to benefit from flexi-access drawdown would need to arrange an initial transfer out of their scheme to a money purchase arrangement. Similarly, if someone has funds in a money purchase arrangement that doesn’t directly offer flexi-access drawdown, they may need to arrange a transfer into a flexi-access drawdown arrangement with the same or another provider. In effect, money purchase schemes are not obliged to offer flexi-access drawdown so its availability will depend on a scheme’s rules and possibly meeting a minimum fund size to access drawdown.
Any new drawdown arrangements set up on or after 6 April 2015 will be flexi-access drawdown, with one exception - a new capped drawdown arrangement can be set up to accept a transfer from an existing capped drawdown arrangement.
Some, but not all, providers may allow an individual to take their protected tax-free lump sum from their existing plan (for example, a section 32 buyout or occupational pension policy) and then move the balance of the funds into drawdown before immediately transferring those funds on a drawdown-to-drawdown basis to a flexi-access drawdown arrangement with the same (or possibly a different) provider. You would need to check with the provider in question whether they have a process to allow this to happen.
Funds in flexible drawdown automatically converted to flexi-access drawdown on 6 April 2015. So, the option to take unlimited income withdrawals continued to be available to anyone who was previously in flexible drawdown.
Prior to 6 April 2015, anyone in flexible drawdown who wanted to make pension contributions had no annual allowance and therefore suffered an annual allowance tax charge on any contributions made. From 6 April 2015, on automatic conversion to flexi-access, such individuals are deemed to have flexibly accessed their benefits on 6 April 2015 regardless of whether they have taken income or whether the flexible drawdown policy still existed at 6 April 2015. This means they now have a full annual allowance, allowing them to contribute up to this limit without attracting an annual allowance tax charge. However, contributions to money purchase arrangements are limited to the MPAA.
It is worth noting that the MPAA has also been available since 6 April 2015 to members who had withdrawn all their funds from their flexible drawdown arrangement(s) before 6 April 2015.
The MPAA doesn’t apply to a dependent who saw their flexible drawdown arrangement convert to flexi-access drawdown on 6 April 2015. They will retain the standard annual allowance (£60,000 for the 2023/24 tax year) unless they trigger the MPAA as a member in some other way, for example taking an UFPLS from their own pension savings. You can find out more about the MPAA in our separate Money Purchase Annual Allowance article.
Members and dependents in capped drawdown can convert their existing arrangement to flexi-access drawdown if the scheme agrees and is able to operate the drawdown arrangement as flexi-access. They can do this by any one of the following actions:
- taking an income withdrawal above the maximum GAD limit, or
- they notify the scheme they want to convert their existing capped drawdown arrangement to flexi-access drawdown and the scheme accepts the notification, or
- on transfer to a new drawdown arrangement in another scheme, they notify the receiving scheme they want to designate the transferred funds to a flexi-access drawdown arrangement and the receiving scheme accepts the notification.
If the conversion of a capped drawdown arrangement to flexi-access drawdown happens as a result of a member requesting it, the MPAA provisions will not be triggered unless income is taken from the flexi-access drawdown arrangement.
If, however, the capped drawdown arrangement is converted to flexi-access drawdown because an income payment above the GAD maximum was paid from the capped drawdown arrangement, then the MPAA provisions will be triggered.
There are generally three options available following a member’s death in flexi-access drawdown. These are a lump sum, an annuity or beneficiary’s flexi-access drawdown. The options available in practice will depend on scheme rules and the instructions given to the provider by the member prior to their death. Members can nominate one or more beneficiaries to receive a share of their flexi-access drawdown fund on death. As part of the claims process, any beneficiary would need to inform the relevant provider what they wanted to do with their share of the fund. If there is more than one beneficiary, they don’t all need to make the same choice and it may also be possible for a beneficiary to split their share of the fund so they receive two or three different benefits.
If a beneficiary chooses an annuity or flexi-access drawdown, this would typically be set up in their own name.
If a member dies before age 75 with remaining flexi-access drawdown funds, any lump sum, annuity or income payments paid to beneficiaries are tax-free. Lump sums have to be paid within two years of a scheme administrator being notified of death to be tax-free. Any lump sums paid after 5 April 2016 out with the two-year period are taxed at the recipient’s marginal rate (or 45% if payment is being made to a ‘non-qualifying person’ such as a trust or legal personal representatives).
If someone dies on or after age 75 with remaining flexi-access drawdown funds, any lump sum paid after 5 April 2016 is taxed at the recipient’s marginal rate (or 45% if payment is being made to a ‘non-qualifying person’ such as a trust or legal personal representatives). Any income payments made to beneficiaries are taxed at the recipient’s marginal rate.
If a member dies in flexi-access drawdown with no remaining dependents, it is possible for a charity lump sum death benefit to be paid to a charity. The charity must be one that was nominated by the member prior to their death. Such a lump sum would be paid tax-free with no lifetime allowance test being carried out.
Since 6 April 2015 death benefits can be paid to a dependent, nominee or successor. More information on death benefits and who they can be paid to can be found in our Death Benefits Guides.
Flexi-access drawdown is the only drawdown option available for new drawdown arrangements set up from 6 April 2015. The flexibility of being able to take unlimited but taxable withdrawals combined with the options available to pass funds on after death means that flexi-access drawdown is an attractive option when taking pension benefits from a money purchase arrangement. However, it isn’t available from every scheme or every provider and there may be minimum fund sizes to meet for setting up a flexi-access drawdown arrangement. Anyone thinking of putting funds into flexi-access drawdown may not only have to decide if it is the right option for them but also work out how to access it from where their existing funds are held.
Information on flexi-access drawdown can be found in HMRC’s Pensions Tax Manual in the following pages:
Drawdown pension rules applying from 6 April 2015:
Beneficiary’s flexi-access drawdown from 6 April 2015:
Tax on authorised lump sum death benefits:
Flexi-access drawdown fund lump sum death benefit: