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 drawdown” and has been available since 6th April 2011.
Historically income drawdown has been restricted by reference to tables produced by the Government Actuary’s Department (GAD). The pensions industry has seen the lack of flexibility around income options as one reason why some clients are put off pension planning. This facility should help in that respect.
For flexible drawdown to be allowed, flexible drawdown conditions need to be met, the member needs to make a declaration to that effect and the scheme administrator has to have accepted the declaration. The conditions are that the minimum income requirement is met, no contributions are paid into money purchase schemes in that year, and that the individual is not an active member of a defined benefit scheme at the time of making the declaration.
The minimum income requirement threshold (MIR) is set at £20,000. However, there are restrictions on what will count as relevant income towards the MIR threshold, as follows:
Payments of a scheme pension or dependant’s scheme pension (only if at least 20 members are in receipt of a scheme pension from the scheme pension).
- Payments of a lifetime annuity or dependants annuity provided by a registered pension scheme
- Payments of a unit-linked or with-profits lifetime annuity or dependant’s annuity provided by a registered pension scheme. The amount counting towards MIR will be the minimum amount guaranteed by the annuity.
- Payments from a relevant non-UK scheme which are classified as a scheme pension or annuity
- Payments of a social security pension, including similar state pensions from outside the UK
Further pension planning
It’s important to note that while there’s no age restriction on flexible drawdown, apart from the normal minimum pension age, individuals in flexible drawdown won’t be eligible to accrue further tax-relieved pension savings.
Tax planning
Individuals with large funds may decide to use the required amount to buy an annuity to cover the MIR, and use the remaining funds to provide income on a tax-efficient basis. The flexibility under this product will allow them to do so.
Some individuals may decide to withdraw enough income to take them up to the higher rate tax threshold each year. Others may decide to withdraw more than this but keep their taxable income below the additional rate tax threshold. Some will be happy to strip out all the funds as soon as they can even if it means paying 50% income tax. This facility may also be useful for those need capital for specific uses, such as long term care health costs.
