Pension income drawdown allows unparalleled pension flexibility at retirement and changes that come into effect in April 2015 make it even more flexible.
Traditionally when it came time to draw benefits a retiree took tax free cash with 25% of the fund and purchased an annuity with the remaining 75%. For many people the security of the promised regular income from an annuity is highly desirable and outweighs other considerations. However the budget in 2014 changed all that. W.e.f. April 2015 100% of a pension fund may be taken as cash with 75% taxed at marginal rate. Play it right and you can put money in with 40% tax relief (or more) and get it out again with 25% totally tax free with the balance only taxed at 20%.
Traditional Pension Income Drawdown provides a means of effectively living off the interest produced by pension investments. There are a variety of tax benefits also. However because pension income becomes dependent on investment return this is really a path for more adventurous/ experienced investors, but the budget means those with smaller fund can take drawdown invest conservatively and reap the rewards although careful planning is still required to maintain sufficient income throughout retirement.
Until April 2015 Drawdown will continue to come in two variants: capped where the maximum income that can be taken is limited to 120% of the government actuary department’s annuity rate and flexible where you can take as much income as you like – but it is taxable at the point of extraction.
You must have a fixed income from other pension sources of at least £12,000 per annum to take flexible income drawdown.
There is no longer any need to purchase an annuity at 75.
So far so good but there are also important planning issues surrounding the area of death benefits. Jim has a crystallised fund of £100K on his death aged 71. His nominated beneficiary is his wife Pam, aged 70. Pam can access the inherited funds tax-free and draw regular income and lump sums for the rest of her life. However, if Pam dies after age 75, any fund that is left will be taxed when it is taken by her beneficiary, at their marginal rate. Had Jim instead nominated his 40 year old son Tom as his beneficiary, his son could have had tax-free access to the fund and there would have been a further 35 years (the period to Tom’s 75th birthday) before the remaining fund would be liable to any tax in the hands of Tom’s chosen beneficiary.
Meanwhile please feel free to Contact Us for further information.
Facts & Figures are chartered financial planners offering independent financial advice from the whole market. We are pension income drawdown experts, based in Ashford and Canterbury in Kent.