May 13, 2011 6:51 pm
New “flexible drawdown” plans are creating a wave of interest among retirees, who are being attracted by the ability to take as much income as they like from an invested pension fund.
While flexible drawdown is still in its early days, many pioneering investors are already using it to make large withdrawals from their pensions – for example, to pay university fees for their grandchildren.
So, to help explain how it works, FT Money has provided answers to the most commonly asked questions.
● Can anyone go into
No. To be eligible, you must have secure pension income of at least £20,000 per year, in additional to your drawdown plan. This Minimum Income Requirement (MIR) is considered a safety net to prevent retirees draining their funds. The minimum age at which flexible drawdown can be taken is 55.
● What counts towards the MIR?
Income from registered pension schemes – such as lifetime annuities, occupational pensions, or the state pension – counts towards the £20,000 minimum. But income from pension schemes with fewer than 20 members, typically Small Self-Administered Schemes, will not count. You must also be already receiving the income for it to be counted – it cannot be based on future income.
● I am in currently in capped drawdown – do I have to wait until my next income review before I can go into flexible drawdown? Or can I move now?
If you can satisfy the MIR, you can move to flexible drawdown at any time.
● How do I prove my income?
You need to provide physical evidence that you are in receipt of secure income of at least £20,000, such as a P60. You must also sign a declaration – supplied by your drawdown provider – stating that you are not an active member of any other registered pension scheme.
● Will my provider offer flexible drawdown?
Not every provider has yet made it available. Even though flexible drawdown became possible from April 6, many providers are holding off until the Finance Bill, containing the rules about flexible drawdown, is given Royal Assent.
AJ Bell, LV=, Sippdeal, Sippcentre and Rowanmoor, Liberty and Premier Pensions are already offering the facility. James Hay is offering flexible drawdown but will not allow members to draw on their benefits until after the Finance Bill is given Royal Assent. At least a dozen other providers are expected to start offering flexible drawdown later in the year.
● What are my options if my provider won’t offer flexible drawdown?
You can either wait until it does, or consider a transfer, which may be costly.
● Would I face a charge if I emptied my flexible drawdown fund?
You may do. Currently, providers are charging fees of £100 to £800 for those who drain their funds in the first one to five years.
●How will my withdrawals be treated for tax purposes?
The usual tax-free lump sum is allowed, but any other withdrawals will be taxed as income in the
tax year that they are paid.
● What about taxes on funds left in drawdown when I die?
A 55 per cent tax charge will apply to lump sum death benefits. Previously, the tax on crystallised funds was 35 per cent, or 82 per cent post age 75.
● Can I continue to make pension contributions while in flexible drawdown?
No. In the year of commencing flexible drawdown, no contributions can be made to a defined-contribution pension scheme and you must also stop being an active member of any defined-benefit scheme.
|Case study: ‘I will take out money tactically’|
Jeremy Cook, a retired management consultant from London, was one of the first investors in the UK to move into flexible drawdown, which allows unlimited access to retirement income.
“My wife and I had always hoped that the age-75 rule would change and we were glad when it did last year,” he says.
However, reforms introduced alongside the scrapping of the age-75 rule meant that staying in income drawdown no longer looked as attractive.
“The income limits on capped drawdown were reduced from 120 per cent of the equivalent annuity rate to 100 per cent,” he says.
“I had always taken out the maximum income so staying in capped drawdown would have meant an income drop. Flexible drawdown solved this problem.”
He says going flexible “was as easy as filling in a form” and providing evidence of additional secure pension income of at least £20,000 to meet the minimum income requirement (MIR).
Cook decided to move into flexible drawdown “as soon as possible” because there was a danger that annuity rates would fall immediately following an EU ruling banning insurers from using gender as a risk factor.
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