Income Drawdown (Unsecured Pension)
Income Drawdown or Unsecured Pension is the name given to the facility to continue to keep your retirement savings invested and take an income each year rather than buy an annuity. This facility can be continued to age 77. Other options may be available, please contact us on 0800 255 0123 to discuss your specific situation.
New rules will come into effect in April 2011 concerning changes announced in the June 2010 Budget. The details of these new rules are not yet known.
The income that can be taken from a drawdown arrangement can be varied each year between a minimum and a maximum. The minimum is £0 and the maximum is 120% of a pension calculated according to tables produced by the Government Actuaries Department (GAD). These tables are based on the amount your fund would buy as an annuity based on your life only and with no allowance for any future increase. The maximum amount needs to be recalculated every 5 years.
Further information about the GAD rates is available from the Revenue's website.
What is Income Drawdown (Unsecured Pension)?
It is a facility that allows an individual aged between 55 and 77 to defer the purchase of their pension from an insurance company. An income is drawn from the fund, and the residual fund remains invested. The maximum income that may be drawn is 120% of the pension that could have been purchased calculated using Government Actuary rates. There is no minimum. Currently the pension must be purchased at age 77.
What are the advantages?
The individual is able to choose to purchase the pension at the time when pension (annuity) rates are favourable. If investment growth is achieved on the residual funds together with the fact that annuity rates increase with age, a higher pension may ultimately be purchased than could have been secured at outset. Also, many individuals are reluctant to purchase a pension from an insurance company since the whole of the purchase price is not returned on death, whereas under income drawdown the residual fund can be returned (see next question).
What happens if I die before age 77?
A surviving spouse or dependant has three options:
- Take a lump sum subject to tax at a rate of 35 %
- Continue income withdrawal
- Purchase an annuity
An annuity purchase by the spouse may be deferred until age 60, but no benefits are payable in the meantime.
Who runs these types of schemes?
Income withdrawal is available to individuals who have a Stakeholder, Personal Pension Self Invested Personal Pension, or possibly who are members of an Executive Pension Plan or a Small Self Administered Pension Scheme.
What are the risks?
If investment performance on the fund remaining is poor, the level of income payable may reduce. The level drawn is reviewed annually. There is thus no guarantee that the pension ultimately purchased will be higher than the amount that could have been purchased at outset.
What sort of fund size do I need?
There may well be fees charged within the income withdrawal arrangement, often on a time cost basis, and there may also be investment management fees, and thus the costs of these arrangements can be high. Whilst it is difficult to be precise, it is generally agreed that a fund should be at least £100,000 before income withdrawal is a viable option.
Can I continue to contribute to my Income Drawdown arrangement?
No, HM Revenue & Customs rules will not allow further contributions to be made once the arrangement has begun.
I started a drawdown arrangement two years ago and I have another policy maturing this year. Can I transfer the proceeds into my existing arrangement, and save me having to start a new one?
Transfers are allowed from other Personal Pension Plans or Stakeholder schemes. The transfer value must be moved in full and cannot be made within one year of a previous transfer.
I have an investment in Commercial Property in my Pension Plan. Do I need to sell it before going into drawdown?
No, this is not necessary but fresh property investment would not be permitted after drawdown has begun. Drawdown would be deemed to have begun when some benefit has been taken. That might be the lump sum only.
