Pensions – The New Flexible Drawdown Rules

3 Mar

I have written this article to help explain the government’s new rules on Drawdown from 6 April 2011.

When deciding how to take your pension benefits is going to be one of the most important financial decisions you will have to make. When you retire, choosing income drawdown allows you to draw a variable income directly from your pension whenever you wish whilst the funds remain invested.

This is instead of handing your pension to an insurance company in return for the secure income of an annuity, income drawdown is a more flexible but riskier alternative where you can keep full control and choose where and how your funds are invested.

Summary of the key rules

  • To qualify for flexible drawdown you must have a secure pension income of £20,000 a year (the limit might be subject to change in the future)
  • You may use flexible drawdown to draw all your pension savings as income without any restriction
  • You will need to complete a declaration that you satisfy the required conditions.
  • You will need to finish saving into pensions.
  • You are not building up further benefits in a defined benefit (or cash balance) scheme
  • any new pension savings made after flexible drawdown is taken will not be tax-relievable and will be liable to the annual allowance charge in full.
  • A separate declaration will need to be made on each separate occasion flexible drawdown is used.

What is flexible drawdown?

Flexible drawdown has the flexibility to allow you to withdraw as little or as much income from your pension fund, as and when you need it. You could in theory withdraw all of the prnsion fund but remember all withdrawals through a pension is assessed against Income Tax.

What is meant by secure pension income and how is the £20,000 calculated?

  • A scheme pension being paid to you from a UK pension scheme that has 20 or more people receiving a pension;
  • A scheme pension being paid to you from overseas;
  • An annuity/scheme pension being paid to you from a defined contribution scheme, such as a private pension or money purchase company pension scheme either from the UK or from overseas
  • A dependant’s pension/annuity being paid to you either from the UK or from overseas
  • A state pension being paid to you either from the UK or from overseas
  • Graduated retirement benefit
  • industrial death benefit
  • widowed mother’s allowance
  • widowed parents allowance
  • widow’s pension payable from the UK or similar benefits from overseas

What Can’t A Secure Pension Income Include?

  • Income drawdown is not regarded as secure pension income for this purpose.
  • Short term annuities are not secure pension income.
  • Protected rights funds (i.e. money from contracting out of the State Second Pension and the State Earnings Related Pension Scheme (SERPS)), cannot be used to draw a flexible income. However, protected rights are expected to be abolished on 6 April 2012 which will effectively remove this restriction.

Some Questions Commonly Asked

Q. I am already using income drawdown. Can I elect to use flexible drawdown?

A. Yes, if you meet the conditions for flexible drawdown and your pension provider allows you to do this.

Q. Can a dependant elect flexible drawdown?

A. Yes. The same rules apply to dependants.

Q. Will I be taxed on the flexible drawdown amount?

A. Yes. The flexible drawdown amount will be subject to income tax in the same way as other pension income.

Q. Does my pension provider have to offer flexible drawdown?

A. No. It will be left to each pension provider to decide whether or not they will allow this. If you are considering using flexible drawdown, you  will need to check if your pension provider is able to offer this option.

If you are considering flexible drawdown, you should seek expert independent financial advice.

Any questions, please ask

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