Pensions are Becoming More Flexible

23 Feb

Income Drawdown (also known as an unsecured pension) allows you to take income from your pension fund while the fund remains invested and continues to benefit from any fund growth.  You generally need a substantial fund value to take income drawdown. The amount of fund varies according the rules of the pension provider, but is around £100,000 as a minimum.

Changes From 6 April 2011

New Income Drawdown rules were introduced from 6 April 2011.  This page contains information relating to those new rules.

Income Drawdown Plans In Place Before 6 April 2011

If you started an Income Drawdown plan before 6 April 2011, you will have to convert to the new rules, or purchase an annuity.  There are transitional rules in place, giving you a deadline to do this.What are the new income drawdown rules?

The new income drawdown rules are as follows:

  • There is no minimum amount of income that must be drawn, irrespective of age. This means that individuals may be able to leave their pension fund untouched for as long as they like, without the necesity to drawing any income.
  • The maximum amount of income that may be drawn is reducing. The new maximum amount of income that may be drawn is 100% of the single life annuity that somebody of the same-sex and age could purchase based on Government Actuary’s Department rates. An individual’s pension provider calculates the maximum income, using standard tables prepared by the Government Actuary’s Department (GAD).
  • The maximum income will generally be reviewed every three years until age 75 and annually from age 75, based on the Government Actuary’s Department rates for an individual of the same age at the time of each review.
  • Tax-free cash lump sums may now be paid after age 75 where an individual has elected to set aside or ‘designate’ funds for income drawdown at the same time, even if they decide to take no income.

If you are considering using income drawdown or delaying taking your tax-free cash lump sum and starting your pension after age 75, please check whether your pension provider is offering these options. If you are considering income drawdown, you should seek expert independent financial advice. The Pensions Advisory Service is unable to give financial advice.

Flexible Drawdown

Flexible drawdown will allow some individuals the opportunity to withdraw as little or as much income from their pension fund, as they choose, as and when they need it. You have to declare that you are already receiving a secure pension income of at least £20,000 a year and have finished saving into pensions.

  • A company pension being paid to you either from the UK or from Overseas; or
  • An annuity being paid to you (from a personal pension or company pension) either from the UK or from Overseas; or
  • A state pension being paid to you either from the UK or from Overseas.

Our understanding is that secured pension income is taken as the gross annual amount of pension (i.e. before any income tax is deducted). The requirement to have a secure pension income of £20,000 might change in the future to increase the level of income required.

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