Phased Drawdown

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What is Phased Drawdown?

Phased Drawdown is a useful financial planning tool to help you manage your clients’ income needs in retirement. For example, it can be useful for those who want to gradually ease back from working full time and start to replace their earnings with pension income.

Phased Drawdown:

  • Allows you to set up regular payments of (tax-free) PCLS supplemented by regular payments of taxable income (if required).
  • Provides lots of flexibility.
  • Allows your clients to leave money in their pension wrapper for longer.

Read this step-by-step Phased Drawdown User Guide to follow how to set up income payments for your clients.

This Q&A is designed to answer any questions you might have.

Watch the Phased Drawdown illustration video hosted here to learn how to prepare an illustration for your clients.

Follow this Pension Benefit Form (T020) Completion Guide to set up the Phased Drawdown income payments.

Why use it?

This short video illustrates how, with careful management, using Phased Drawdown, FAD and UFPLS can help your clients:

 

In summary, you can use Phased Drawdown to:

  • Draw income while paying less tax.
  • Maximise use of their personal tax allowances.
  • Manage client’s income around the relevant tax bands.
  • Maximise use of their tax-free PCLS.
  • Keep more of their funds invested in the pension wrapper and therefore benefit from tax-free investment growth and the generation of more tax-free cash over time.
  • Avoid triggering Money Purchase Annual Allowance by drawing only tax-free cash and no taxable income.
  • Avoid withdrawing lump sums that act to increase Inheritance Tax liabilities.

How might your clients’ income needs be determined?

Deciding how much income your clients can afford to take under income drawdown needs careful planning. It depends on:

  • The size of their accrued pension.
  • The desired amount of income and their attitude to risk.
  • The performance of their investments over time.
  • Any other sources of income they have to rely on.
  • How long they expect to live.
  • Whether they want to provide for someone else after they die.

Practical help

Simply complete an illustration using the Personalised Illustration tool on Transact Online and then complete a Pension Benefit (T020 form) specifying:

  • The source wrapper that you wish to crystallise.
  • The destination wrapper you want to draw phased retirement income from.
  • The amounts of tax-free cash and taxable income, frequency, start date and payment dates.
  • The investments that should be moved from the accrual wrapper to the Destination Drawdown Wrapper.

Please note that there must be sufficient cash in the client’s source accrual wrapper to cover the ongoing tax-free cash payments. One way to achieve this would be to set up a Regular Sale instruction in the source accrual wrapper for an amount that matches or exceeds the amount of tax-free cash requested.

Additionally, where clients have also requested a regular amount of taxable income, a Regular Sale instruction could also be set up in the Destination Drawdown Wrapper.

  • Any lifetime allowance protection, including any certificates or Protection Notification Number.