In the December 2010 Autumn Tax Updates, 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 6 April 2011. Historically, Income Drawdown has been restricted by reference to tables produced by the Government Actuaries Department (GAD).
Since the introduction of Income Drawdown rules, maximum income had been capped at 120 per cent GAD for individuals under 75. From 6 April 2011, the maximum has been reduced further to 100 per cent GAD, although in his recent Autumn Statement, the Chancellor announced it would revert back to 120 per cent with effect from 26 March 2013.
The pensions industry has seen the increasing lack of flexibility around the income options as one reason why many have been put off pension planning.
To qualify for Flexible Drawdown, a number of conditions must be met:
- No contributions can be paid into Money Purchase Schemes in the tax year Flexible Drawdown is taken. Also, the individual cannot be an active member of a defined benefit scheme when electing for Flexible Drawdown.
The minimum income requirement (MIR) threshold has been set at £20,000 and is the same, regardless of age, sex or marital status. It is due to be reviewed by the Treasury at least every five years. Future reviews of MIR levels will only affect individuals starting Flexible Drawdown. Once qualified, there will be no further testing.
Pension income that counts as ‘Relevant Pension Income’ includes:
- State Pensions – including Basic State Pension and State Second Pension
- Scheme Pensions – normally provided by a Final Salary (Defined Benefit Scheme)
- Lifetime Annuities – where a guaranteed lifetime income is purchased from an insurance company.
Pension income that does not count towards Relevant Pension Income includes:
- Conventional Drawdown, Purchase Life Annuities or Scheme Pension from a SSAS.
It is important to note that while there is no age restriction on Flexible Drawdown, apart from the normal minimum pension age, individuals in Flexible Drawdown will not be eligible to accrue further tax-relieved pension savings.
As many dentists are members of the SPPA they should be able to satisfy the minimum income requirement of £20,000 a year by virtue of pension income from that source. Many will have Money Purchase Pension Funds elsewhere – personal pensions, retirement annuity contracts, AVCs and FSAVCs – and may wish to consider Flexible Drawdown to ’strip out’ income from these funds at an accelerated rate.
’In and straight out ’ – if you have a relatively small fund, or have need to take the entire fund, then you can put funds into a Flexible Drawdown Plan and straight out in one lump sum. Twenty–five per cent will be tax free, with the balance taxed at your highest marginal rate.
’In and out over a number of years’ – regardless of fund size, you can stagger payments out over a number of years, ensuring greatest flexibility and tax efficiency.
’Phased flexible drawdown’ – gives control over income, while maximising death benefits before the age of 75, offering access to income and avoidance of 55 per cent tax charge on death on unvested funds.
Pension payments withdrawn using Flexible Drawdown are treated in exactly the same way as normal drawdown and are taxed at member ’s marginal tax rate. This will be an important consideration for members, as large pension payments will trigger a potential tax liability of up to 50 per cent.
About the author
Alasdair MacDougall Dip PFS is a director with Martin Aitken Financial Services Ltd.ıThe purpose of this article is to provide technical and generic guidance and should not be interpreted as a personal recommendation. The article represents our interpretation of current and proposed legislation as at the date of publication. This may change in the future.
Martin Aitken Financial Services Ltd is authorised and regulated by the Financial Services Authority.
Figures obtained from Scottish Widows, A J Bell, Axa Wealth and Skandia.