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  3. Taking pension benefits

Understanding income drawdown

Up to 60 CPD minutes

Introduction
Income drawdown allows individuals to leave their pension fund invested and take as much or as little from their fund, when they need it. This flexibility over when and how to take an income means that individuals accessing drawdown will need advice throughout their retirement. It’s therefore vital that advisers fully understand how drawdown works and how to ensure that their clients can access their pension funds as efficiently as possible.

This module should take around 60 minutes to complete. It includes a short self-assessment quiz to test what you’ve learned. A 60 minutes CII/PFS accredited CPD certificate can be claimed.
Outcomes
On completion of this module you should be able to:
  • Explain how income drawdown works and the potential advantages of using it
  • Describe the differences between flexi-access drawdown and capped drawdown
  • Describe the different ways in which tax free cash and income can be taken, to ensure income drawdown is used tax efficiently

Learning material

Income drawdown
This part of the module explains how income drawdown works and the potential advantages of using it. It also explains the difference between flexi-access and capped drawdown and the rules around drawdown transfers.

CPD minutes: up to 30
Practical guide - Using drawdown tax efficientlyOpens in new window
Using drawdown tax efficiently
The second part of this module looks at how the flexibility available under income drawdown can be used to provide lump sums and/or income, tax efficiently - avoiding unnecessary tax.

CPD minutes: up to 30
Practical guide - Using drawdown tax efficientlyOpens in new window

Post learning assessment

Question 1

Which of the following is NOT a potential advantage of using income drawdown?

a. Funds can remain invested, giving potential for investment growth
b. Funds can be accessed from age 50 as and when you need them
c. Remaining funds can be passed on to beneficiaries on death
d. Flexibility gives the ability to take the funds tax efficiently

Question 2
Which of the following statements is FALSE?

a. A member can take up to 120% of the basis amount each drawdown year under capped drawdown
b. Taking income under flexi-access drawdown triggers the money purchase annual allowance (MPAA)
c. It’s possible to take all the funds in one go under flexi-access drawdown
d. Capped drawdown funds can remain as capped drawdown funds on transfer
Question 3
Which of the following statements are TRUE? (More than one may apply)

a. Funds can be moved into income drawdown in stages (often referred to as ‘phasing’)
b. Initial income payments may be taxed using an emergency tax code, resulting in a possible overpayment of tax, which can’t be reclaimed
c. Drawing large amounts in one tax year can lead to a bigger tax bill than if spread over a longer period
d. If tax free cash is paid, at least a nominal income must be drawn from the balance funds

Check your answers

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Any reference to legislation and tax is based on our understanding of United Kingdom law and HM Revenue & Customs practice at the date of production. These may be subject to change in the future. Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circumstances. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments.