Pension fund withdrawal (also known as Income drawdown) is an important retirement option worth considering, particularly for individuals who have larger pension funds, typically in excess of £150,000 after taking any pension commencement lump sum (tax free cash) entitlement.
Pension Fund Withdrawal was introduced as an alternative option to purchasing an annuity at retirement. Pension Fund Withdrawal allows an income to be taken directly from the pension fund itself.
Pension Fund Withdrawal offers greater flexibility and control over your retirement income than the traditional approach of annuity purchase. Most of the major insurance companies now offer ‘Income drawdown’ plans.
Under Pension Fund Withdrawal there are now two options, Capped Drawdown and 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 efficiently.
An annual income can be taken from the fund if required. However a maximum level is set by the Governments Actuary Department (GAD) based on the size of the fund, age and current gilt yields. These GAD tables are broadly equivalent to a single life level annuity that you could have purchased. The maximum income can be no more than 120% of the GAD rate, with the corresponding minimum income currently set at 0%. This GAD rate will be reviewed every 3 years.
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 with the Capped Drawdown until their death.
Flexible drawdown was introduced from 6th April 2011. This allows an individual to take as much income as required from the pension fund from age 55, whilst keeping any remaining fund invested. It is possible with this option to take the whole fund in one go, subject to a personal tax liability. Flexible Drawdown is only available to individuals who have other secure pension income from other sources (known as the minimum income requirement) amounting to £20,000 a year.
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 selected.
Upon death any remaining fund in flexible drawdown would be subject to a tax charge of 55% if paid to a named beneficiary.
Flexible drawdown could be suitable for individuals who have no need to guarantee any further income because they already have pensions of at least £20,000 a year. Given the nature of Flexible Drawdown it is only really suitable for the more sophisticated investor.
A PENSION IS A LONG TERM INVESTMENT THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN. YOUR EVENTUAL INCOME MAY DEPEND ON THE SIZE OF THE FUND AT RETIREMENT, FUTURE INTEREST RATES, AND TAX LEGISLATION
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