Traditionally, one of the biggest bones of contention with pensions – both from advisers and savers alike – was the compulsion to take an annuity from your pension fund at age 75. Money was locked away in a pension fund and then you had to take an annuity.
With people generally living longer this was seen as an unnecessarily restrictive piece of legislation and in April 2011 the stipulation was finally removed, with ‘Flexible Drawdown’ being introduced.
What is flexible drawdown? As the name suggests, it’s the ability to ‘draw down’ an income from your pension fund without necessarily using the whole fund – as would be the case it you were compelled to buy an annuity.
Flexible Drawdown is complex – many who might qualify run the risk of missing out through not understanding the legislation and the options. It is very much an area where expert financial advice is well worth having. Neither is flexible drawdown available to everyone – you must have a guaranteed ‘lifetime income’ of £20,000 per annum to qualify for the arrangement. Typically, this income will come from state pensions, occupational pensions and lifetime annuities.
However, for those people that do meet the necessary criteria and qualify for Flexible Drawdown, there will be significant advantages from the arrangement:
- You can put money into your pension and then take the tax free cash before starting your flexible drawdown arrangement
- The income you take can be varied – which gives good opportunities for efficient tax planning
- There’s no maximum to the income you can take (but see the first disadvantage below)
- Money remaining in the fund and not paid out as income can be invested, so that it could grow further
- You could if you wished take the entire fund as income in one go
- Any fund that remains at the time of your death can be passed on to your beneficiaries – and the Treasury has confirmed that pension drawdown funds will not be subject to inheritance tax
Balancing this there are disadvantages, with the main ones being:
- Any withdrawals you take are subject to tax
- The costs of the arrangement can be high – especially for smaller funds
- The money not withdrawn – that is, left invested in the fund – could fall in value
- Finally, if the money withdrawn from the arrangement is not spent, it needs to be re-invested somewhere. If you don’t need or want the income it’s probably best not to set up a flexible drawdown arrangement in the first place
Flexible drawdown is clearly not going to be applicable for most people’s financial planning. Even if an individual is eligible for drawdown, it doesn’t necessarily follow that it is the right solution. However, where it is the right solution, using flexible drawdown can be very advantageous.
Clearly it is a specialised area of pension planning and requires an experienced and knowledgeable adviser. If you think that drawdown might be right for you – or if you would like to discuss your pension planning in more detail – then please don’t hesitate to contact us. We’ll be only too pleased to take a detailed look at all the options with you.
Sources: http://citywire.co.uk/new-model-adviser/why-it-pays-to-navigate-perils-of-flexible-drawdown/a488924, http://www.hmrc.gov.uk/budget-updates/autumn-tax/tiin2955.pdf, http://www.ifaonline.co.uk/ifaonline/news/2136520/hmrc-grants-flexibility-drawdown-reviews