Flexible Drawdown
Flexible Drawdown, has replaced income drawdown or pension fund withdrawal, as an option that allows you to take a taxable income directly from the pension fund, without buying an annuity.
Investors now have the freedom to choose when and how they take their pension, with the withdrawal of the compulsory annuity age of 75. From 6 April 2011, investors have now been given more flexibility about how they choose to use their retirement savings. You are still able to convert funds to an annuity if you wish, but you also have more options such as Income Drawdown and continuing your pension investment. Individuals who are already in drawdown will not be immediately subject to the new requirements; however, transitional rules apply. If this applies to you, you’ll need to adopt the new rules either at the end of your current review period or earlier if you transfer to another drawdown plan. Investors can use Income Drawdown or take no income at all from their pension for as long as they require. However, tax charges on any lump sum death payments will prevent this option being used to avoid Inheritance Tax (IHT). The rules regarding Alternatively Secured Pensions (ASPs) have been repealed; existing ASP plans convert to Income Drawdown (previously known as Unsecured Pension, or USP) and subject to the new rules.
A new drawdown, called Flexible Drawdown, allows those who meet certain criteria to take as much income as they want from their fund in retirement. It will normally only be available for those over 55 who can prove they are already receiving a secure pension income of over £20,000 a year when they first go into Flexible Drawdown. The secure income can be made up of State pension or from a pension scheme and does not need to be inflation proofed. Investment income does not count. Restrictions have been designed to prevent people from taking all their Protected Rights or from using Flexible Drawdown while still building up pension benefits. The previous drawdown option after 6 April 2011 has become known as Capped Income Drawdown. The maximum income is broadly equivalent to the income available from a single life, level annuity. This is a slight reduction on the previous maximum income allowed. There is no minimum income, even after age 75. The maximum amount will be reviewed every three years rather than every five years. Reviews after age 75 will be carried out annually. Unlike ASPs, the income available after age 75 is now based on your actual age rather than defaulting to age 75.
Death Benefits and Tax Charges
The changes to death benefits and tax charges mean that if you die while your pension fund is in either form of drawdown, or after the age of 75, all of your remaining fund can be used to provide a taable income for a spouse or dpendant. Alternatively, it can be passed on to a beneficiary of your choice as a lump sum, subject to a 55% tax charge (or 0% if paid to a charity). Previously, a tax charge of up to 82% applied to applied to lump sums paid after age 75, making it now far more attractive for people to pay in to their pensions and consider the IHT benefit of doing so. Previously, a pension fund whichhad been "cysstallised" by usinh Income Drawdown was subject to a 35% tax charge if the member dies and any surviving spouse chose to take the fund as a lump sum. From the 5th April 2011, this has increased to 55%, and applies to plans currently in force. It is also worth noting that, after age 75, this 55% tax chyarge applies even to funds that have not been crystallised (from which no lump sum or income benefit has been taken).
If you’re unsure whether flexible drawdown is right for you, call us for advice.If you’re unsure whether income withdrawal is right for you, call us for advice.
Short-term annuities
Phased retirement