Retirement Planning information from Barclays Stockbrokers - Pension Income Drawdown
Pension Income Drawdown

Pension Income Drawdown 

Find out more about the changes to the SIPP regulations

Income drawdown is an alternative to buying an annuity. It allows your pension fund to remain invested whilst you draw an income from the fund. This allows you to remain in control of the investments. 
 
One of the main advantages is that you still have control over the investments – so, providing the fund is not depleted by excessive income withdrawals or poor performance, it may be possible to generate more income for yourself than you would get from an annuity. However, the value of your fund may be change significantly from year to year, both upwards and downwards, as the fund remains exposed to the stock market. This means that you may not be able to draw as much income as you want during periods of poor market returns. Also, you bear the risk that if the fund does not perform sufficiently well, you could receive much less over your retirement than if you had opted for an annuity instead.
 
There have been significant changes to the pensions legislation surrounding income drawdown and from 6 April 2011 the following 3 provisions have been abolished:
  • Compulsion to draw benefits by age 75.
  • Unsecured pension (USP) between ages 55-75.
  • Alternatively Secured pension (ASP) between age 75 and death.
 
These have been replaced with two new provisions – Capped Drawdown and Flexible Drawdown. Both of these  provisions can be started, amended and rescinded in lieu of an annuity alternative at anytime.
 
For people who are already utilising the USP or ASP drawdown options, transitional terms will apply to convert them into one of the new provisions.
 

Capped drawdown

Capped drawdown rules have replaced the unsecured pensions (USP) and the alternatively secured pensions (ASP) regime for income drawdown from 6 April 2011.
 
  • Capped drawdown can be selected at anytime after the attainment of age 55.
  • The planholder is required to select or waive the Pension Commencement Lump Sum prior to commencing the provision.
  • The rules permit the planholder to draw between 0% - 100%  of the Government Actuary’s Department (GAD) limits on an annual basis. (100% is approximately the same as the single life annuity rate). (The 100% GAD limit is expected to be increased to 120% in March 2013 - exact details have not yet been confirmed).
  • There is no requirement to draw any income.
  • The maximum drawdown limit will be reviewed every 3 years based on the fund value and the GAD limits at the time.
  • Income is taxed at the planholder’s highest marginal rate of Income Tax.
  • Planholders may continue to contribute to pensions during this process.
 

Flexible drawdown

  • Flexible drawdown can be selected at anytime after the attainment of age 55.
  • The planholder is required to select or waive the Pension Commencement Lump Sum prior to commencing the provision.
  • The rules require the planholder to secure a Minimum Income Requirement (MIR) equal to £20,000pa sourced from State pensions, Occupational Pensions and Pension Annuities. (Non pension income and income from Capped Drawdown do not qualify as MIR).
  • Once satisfied, the planholder may draw as little or as much from the remaining fund as they wish, including encashing the whole fund. Any encashments are deemed income.
  • Income is taxed at the planholder’s highest marginal rate of Income Tax.
  • Planholders may not contribute to pensions during this process.

Find out more about taking an income from a SIPP including worked examples of the Governments Actuary Department rates.
 
 

Advantages of a Pension Income Drawdown:

  • You retain ownership of your pension fund.
  • The income you withdraw can be varied each year up to the maximum amount, to suit your needs or control your tax liabilities.
  • You can take the tax-free lump sum at retirement.
  • You can defer buying an annuity.
  • You can top up your drawdown and benefit from tax relief.
 

Potential disadvantages:

  • Investment charges continue as long as your pension fund is invested.
  • High income withdrawals may not be sustainable.
  • Taking withdrawals can erode the capital value of the fund, especially if investment returns are poor and a high level of income is being taken.
  • Annuity rates may be at a worse level when annuity purchase takes place.
  • Your spouse or dependant will be liable for a tax charge on the amount remaining in your fund on your death.
  • Unlike annuities, you don’t have a guaranteed lifetime income.
  • Potential risk that benefits could be lower than if an annuity had been bought.
 
 

Other Considerations:

The death benefits are typically more beneficial than under an annuity. If you die whilst in income drawdown these are some of the options: 
  • A beneficiary could receive some or all the remaining funds as a lump sum less 35% tax charge.
  • A dependant can carry on with income drawdown - all income would be taxable.
  • A dependant can take the fund and buy an annuity - all income would be taxable.
 

Please wait …