Retirement Planning

Income Drawdown

We strongly recommend all retirees seek independent financial advice before taking their pension.

Drawdown Pensions are a way of taking benefits from your pension fund without purchasing a lifetime annuity. This type of plan is aimed at the more financially aware investor and tends to attract those with larger pension funds. The minimum amount that can be invested varies from company to company and benefits are currently available from age 55 onwards. Changes to taking benefits from pension plans (not including final salary schemes)

From April 2015 the government is lifting all restrictions on your ability to draw down from your defined contribution pension pots after age 55. The tax rules will be drastically simplified to give people easy, flexible access to their pension savings.

Apart from the tax free cash element of the pension fund (usually 25%) any funds withdrawn will be taxed as income at your marginal rate of income tax. Under the new system, the government will not tell you what you can do with your pension. It will be up to you to decide how you want to access it, either as a lump sum or through a financial product:

• Those who want greater control over their finances in the short term will be able to take all their pension savings in one go, and invest or spend them as they see fit. This flexibility will be particularly beneficial for those with a relatively small amount of pension savings for whom buying a financial product is not in their best interests;
• Those who want the security of an annuity will be able to purchase one, either at retirement, or later; using some or all of the pension pot.
• Those who prefer to keep their pension invested and take a flexible income over time will be able to purchase a drawdown product. However, there will be no limits on the amount you can withdraw, and no minimum income requirement.

How Drawdown works

Your current pension fund is transferred into a new Drawdown Pension plan. You decide, up to the maximum available, what amount of tax-free cash you want and this is immediately paid to you. The maximum tax free cash sum you can normally take is 25% of the value of your pension funds. The remainder of your fund is invested and from this fund you can choose to withdraw income. If the total value of all your pension benefits exceeds your “Lifetime Allowance” you will be subject to a tax charge of up to 55% on the excess fund. From the 2014/15 tax year the Lifetime Allowance is £1.25 million and this will reduce further to £1m from April 2016.

Death Benefits

If you die whilst in Drawdown Pension, the following options are available to your dependants:
• Continue to take withdrawals in the same way. Income tax is charged on the withdrawals as earnings in the usual way.
• Buy an annuity, which is taxable in the usual way.
• Take the remaining fund as a lump sum with no tax liability after April 2015 if you are less than 75 and at your marginal rate of tax if over age 75. There will normally be no Inheritance Tax due on Drawdown Pension funds at any age and the whole process will become much more tax efficient with recent legislative changes.

Investment considerations

The investment portfolio has to be capable of supporting the income which will be drawn from it. It is best to consult an experienced independent financial adviser who will be able to recommend a suitable investment portfolio.