Pensions Fund Withdrawal
Pension fund withdrawal (also known as Income drawdown) is an important retirement option worth considering, particularly for individuals who have pension capital of at least £100,000.
Pension Fund Withdrawal plans were introduced following changes to Pension law in 1995. The changes removed the previous requirement to purchase an annuity at retirement. Pension Fund Withdrawal allows an income to be taken directly from the pension fund itself.
Pension Fund Withdrawal enhances the flexibility in that annuity purchase can be deferred until a time when it may be more suitable. Most of the major insurance companies now offer 'Income drawdown' plans. These plans still allow up to 25% of the retirement fund to be taken as Tax Free Cash.
Under Pension Fund Withdrawal there are now two options, Capped Drawdown or Flexible Drawdown.
With capped Drawdown you can elect to take a tax free lump sum and rather than buy an annuity leave the fund invested to continue growing tax free.
An annual income can be taken from the fund if required. However a maximum level is set by the Government Actuary's Department (GAD) based on the size of the fund, age, sex and current gilt yields. These GAD tables are broadly equivalent to a single life annuity that you could have purchased. The maximum income can be no more 150% of the GAD rate. This GAD rate will be reviewed every 3 years.
There is no minimum income limit so an annuity does not need to be purchased so funds can remain invested until death. Upon death the residual fund can be taken as a lump sum with a 55% tax charge or the fund can be used to buy an annuity for the nominated beneficiary or they can continue to undertake drawdown until their death.
Flexible drawdown was introduced from April 2011, allowing individuals to take as much income as required from the pension fund from age 55, whilst keeping any remaining fund invested. However it is possible that the whole fund could be utilised as income, subject to a personal tax liability, and on the basis that flexible drawdown is only available to individuals who have other secure pension income from other sources amounting to £12,000 a year (this can include state pensions).
This minimum income requirement (MIR) will be reviewed every five years although there will no further test of the MIR once flexible drawdown has been opted for.
Upon death any remaining fund in flexible drawdown would be subject to a tax charge of 55% if paid to a named beneficiary otherwise the fund would pass to a nominated charity.
Flexible drawdown could be suitable for individuals who have no need to guarantee any further income because they already have pensions of at least £12,000 a year. Given the nature of the facility that this type of drawdown offers the inherent risks would mean that any individual considering this type of drawdown needs to be relatively sophisticated in understanding the implications.
A pension is a long term investment. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation. We strongly recommend advice from us be sought if you are considering this option.