In December 2010 the Government announced the introduction of a facility to allow unlimited pension income drawdown as long as members could satisfy a few requirements. This is referred to as ‘flexible income drawdown’ and has been available since 6 April 2011.
Historically income drawdown has been restricted by reference to tables produced by the Government Actuary’s Department (GAD). Since the introduction of income drawdown rules the maximum income has been capped at 120 per cent of GAD for individuals under 75, and this has been reduced to 100 per cent from 6 April 2011 with some transitional provisions.
Flexible income drawdown is a type of income withdrawal where you can take pension income direct from your pension fund without having to purchase an annuity. Ordinarily, there are limits on the maximum income you can take under income withdrawal (known as ‘capped drawdown’).
Secured pension income
Provided you have a secured pension income of over £20,000 ‘Minimum Income Requirement’ a year (which can include any State pension), you could be eligible to use flexible income drawdown in respect of your money purchase pension savings.
The eligibility rules for flexible income drawdown from pensions were untouched by Budget 2013, which is welcome news if this is something you are considering or would like to find out more about.
Under flexible income drawdown there is no limit on the amount of income you can take in any year. You can tailor your drawdown pension to suit your personal requirements, whether taking regular amounts at a set frequency or ad hoc income when required. There is even the option to draw the entire fund in one go. All income withdrawal payments are subject to income tax under PAYE at your appropriate marginal rate.
Flexible income drawdown is tax-efficient, particularly where you wish to ‘phase in’ the use of your pension savings to provide that income. Any money left in drawdown on death is subject to a 55 per cent tax charge, whereas any untouched pension fund money (pre-age 75) can pass on to your beneficiaries free of tax.
Once you go into flexible income drawdown you can no longer make tax-efficient pension contributions, so you should look to maximise all allowances, including carry forward, this tax year.
Flexible income drawdown is a complex area. If you are at all uncertain about its suitability for your circumstances we strongly suggest you seek professional financial advice. This is a high-risk option which is not suitable for everyone. If the market moves against you, capital and income will fall. High withdrawals will also deplete the fund, particularly leaving you short on income later in retirement.