Income drawdown refers to a process by which a pension income is withdrawn direct from your pension fund, either as an alternative or a top-up to an annuity.
The attraction of drawdown, in many people’s eyes, is that whatever remains of your fund after you die can be passed on to your heirs as a lump sum, currently subject to a special 55 per cent death benefits tax charge (the Chancellor announced on 29 September 2014 that this charge would be abolished from 6 April 2015). Alternatively, your spouse or other dependants can also usually continue to take the drawdown income from the remaining funds for the rest of their life without incurring the death benefits tax charge – although it will be subject to income tax just as it is throughout your lifetime (again, the rules governing this are changing in April 2015, with any nominated beneficiary to be able to inherit your pension fund tax-free if you die before the age of 75 or to make withdrawals, incurring income tax at their marginal rate, if you die aged 75 or above).
The amount that retirees may withdraw each year is currently determined by the standard annuity rate set by the Government Actuary’s Department (the “GAD rate”). This is unlikely to be as high as the best annuity rate available on the market, especially if you smoke or suffer from a medical condition that might be expected to reduce your life expectancy below the average.
It is, however, possible to enter “flexible drawdown” if you have a “secure income” (usually an annuity or final salary/defined benefit pension, plus the State Pension) of £12,000 or more per year. In this case, because the government is not concerned that you might need to fall back on state support if you run your pension fund down to zero, the limit on the amount you can withdraw from your pension fund in any given year is removed.
In his 2014 Budget the Chancellor of the Exchequer reduced the minimum secure income that qualifies an individual for flexible drawdown from £20,000 to £12,000 and, at the same time, increased the rate at which capped drawdown plans could pay out from 120 per cent to 150 per cent of the GAD rate.
From 6 April 2015, meanwhile, all restrictions on the amount of income that can be taken under an income drawdown arrangement are planned to be removed. Withdrawals in excess of existing drawdown limits will simply be taxed at the individual's marginal rate. Full details of the Government's proposals can be found here.
Although this added flexibility is broadly to be welcomed, it also carries with it an additional burden of risk. The possibility of overspending and running out of money means that a solid financial plan and appropriate investment strategy, backed up by an accurate lifelong cashflow forecast, will be essential for many.
Drawdown incomes can be taken in a variety of permutations, including “drip feed” arrangements that crystallise a small amount of your pension fund each month, topping up the income withdrawn with tax free cash in order to minimise your income tax bill and maximise the “pre-crystallised” pension pot that can be passed on to your dependants tax-free.
Drawdown is a complicated process and expert advice is essential. In any form of drawdown arrangement it is also vital that the investments in your pension funds are managed in such a way as to meet your income needs for the rest of your life.
Clarion Wealth Planning Limited’s team have extensive experience administering drawdown arrangements and managing the investments of clients who choose to take an income from their pension funds. To find out more about income drawdown and whether it might be appropriate in your circumstances please call Clarion Wealth Planning on 01565 653804 or send us an email.