Pensions – The New Drawdown Rules

13 Mar

On 6 April 2011, the government announced that you no longer have to take pension benefits by the age of 75.

Previously, any tax-free cash lump sum had to be taken by the age of 75 and a pension set up at the same time. The only alternative was if you had a big enough fund to take an income directly from it (known as income drawdown).

This article outlines the key government’s new rules. These rules affect benefits in personal pensions and money purchase occupational pension schemes.

Key Changes :-

  • You can now take a tax-free cash lump sum after age 75;
  • You can now buy an annuity after age 75;
  • The maximum income drawdown payment is calculated differently; and
  • New ‘flexible drawdown rules’ with unlimited withdrawals if you already have a secure pension income of £20,000.

 

What is income drawdown?

Income drawdown allows you to take income from your pension fund while the fund remains invested and continues to benefit from any investment growth.

You generally need a substantial fund to take income drawdown. The amount of fund varies according the rules of the pension provider, but is often around £100,000.

If you have a big enough fund to use income drawdown, you will be able to keep your funds invested and draw an income directly from it indefinitely.

In addition, if you have a ‘secure’ pension income of £20,000 a year, you can take as much income drawdown from your fund in retirement as you want by using ‘flexible drawdown’.

The new income drawdown rules provide an alternative option if you prefer to have greater control and flexibility over how and when you receive your pension income. In theory, you may be able to leave your pension fund untouched for as long as you like assuming allowable by your pension scheme.

The New Drawdown Rules

  • There is no minimum amount of income that you must draw, irrespective of age. i.e. you could leave your pension fund untouched for as long as you like, without having to draw any income.
  • The maximum amount of income that you may draw has reduced to 100% of a single life annuity that a person of the same gender and age could purchase
  • The maximum income will generally be reviewed every three years until age 75 and annually from age 75
  • Tax-free cash lump sums may now be paid after age 75, even if you decide to take no income.

Will my pension provider have to offer income drawdown?

No – each pension provider will decide if they will provide income drawdown.

If I am already using income drawdown, can I buy an annuity at anytime?

Yes – the rules on this have not changed.

IF YOU ARE CONSIDERING INCOME DRAWDOWN, SEEK INDEPENDENT FINANCIAL ADVICE

Any question, please ask welshmoneywiz@virginmedia.com

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