25 Jul 2011

What is the impact of flexible drawdown pension plans?

What is the impact of flexible drawdown pension plans?

Neil Aspinall, Financial Adviser at Aberdein Considine, looks at the impact of the newly available flexible drawdown pension plan and just what impact this may have on the options available to the public when it comes to making that important retirement planning decision.

Neil Aspinall, Financial Adviser at Aberdein Considine, looks at the impact of the newly available flexible drawdown pension plan and just what impact this may have on the options available to the public when it comes to making that important retirement planning decision.

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. To help explain how it works and so you can consider if flexible drawdown would be suitable for your own circumstances, I have answered some common questions

What is flexible drawdown?

Under flexible drawdown there's no limit on the amount of income that can be drawn each year - the individual can take their entire pension fund out in one go if they really want to! The usual tax free lump sum is allowed, but any other withdrawals taken by the individual will be taxed as income in the tax year they're paid. If an individual becomes non-UK resident whilst in flexible drawdown, any income drawn when non-resident will be subject to UK tax if they return to the UK within five tax years of taking it.

Can anyone go into flexible drawdown?

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 Minimum Income Requirement?

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 and 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. AJ Bell, LV=, Sippdeal, Sippcentre and Rowanmoor, James Hay, Liberty and Premier Pensions are already offering the facility. 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 would require your options to be looked at by one of our Independent Financial Advisers.

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.

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. Any reference to legislation and tax is based on Aberdein Considine's understanding of United Kingdom law and HM Revenue & Customs practice at the date of production. These may be subject to change in the future. Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circumstances. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments.

Neil Aspinall, Financial Adviser


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