What is flexi-access drawdown (FAD)?
Flexi-access drawdown lets you take a tax-free lump sum (also known as ‘pension commencement lump sum’) from your SIPP, while leaving the rest invested to take an income from as you choose. If you don’t decide to buy an annuity, the rest of your pot will be moved into drawdown.
There is no minimum or maximum limit on the income you can take from your drawdown pot. But if you rely on the income from your pension to support you, you should consider taking a level of income that will be sustainable for your lifetime.
The income you do take will be subject to income tax at your marginal rate. Until we receive a tax code from HMRC, we may need to apply an emergency 'Month 1' tax code – meaning HMRC will assume it's the first in a series of monthly withdrawals. This could mean you’ll pay more tax up front than you were expecting, though HMRC should refund any tax you overpay.
What you don't take from your drawdown pot will remain invested within your tax-free SIPP wrapper. These are often referred to as ‘crystallised funds’. Once you take an income payment from your flexi-access drawdown pot, the amount you can contribute each year to your SIPP (and any other money purchase pensions) will be restricted to £4,000 per annum. This is known as the money purchase annual allowance (MPAA).
Mark has a SIPP valued at £100,000 which he hasn't yet accessed. He decides to take his maximum tax-free lump sum of £25,000, leaving him with £75,000 which he can use to provide himself with an income.
Mark chooses not to purchase an annuity, so the £75,000 will be moved into a flexi-access drawdown pot, from which he’ll be able to take income without any limits.
Any income payments Mark chooses to take from his £75,000 pot (his ‘crystallised funds’) will be subject to tax at his marginal rate.