Pensions Fund Withdrawal
Pension fund withdrawal (also known as Income drawdown) is an important retirement option worth considering, particularly for individuals who have pension capital of at least £100,000 or who are able to take variable income from their pension.
Pension Fund Withdrawal plans were introduced following changes to Pension law in 1995. The changes removed the previous requirement to purchase an annuity at retirement. Pension Fund Withdrawal allows an income to be taken directly from the pension fund itself.
Pension Fund Withdrawal enhances the flexibility in that annuity purchase can be deferred until a time when it may be more suitable. Most of the major insurance companies now offer 'Income drawdown' plans. These plans still allow up to 25% of the retirement fund to be taken as Tax Free Cash.
Under Pension Fund Withdrawal there are now two options, Capped Drawdown or flexible drawdown
Capped Drawdown
With capped Drawdown you can elect to take a tax free lump sum and rather than buy an annuity leave the fund invested to continue growing tax free. In most cases you will need to transfer your pension into a SIPP to facilitate a drawdown contract as most personal pensions do not provide this facility.
An annual income can be taken from the fund if required. However a maximum level is set by the Governments Actuary Department (GAD) based on the size of the fund, age, sex and current gilt yields. These GAD tables are broadly equivalent to a single life annuity that you could have purchased. The maximum income can be no more 100% of the GAD rate. This GAD rate will be reviewed every 3 years.
There is no minimum income limit so an annuity does not need to be purchased so funds can remain invested until death. Upon death the residual fund can be taken as a lump sum with a 55% tax charge or the fund can be used to buy an annuity for the nominated beneficiary or they can continue to undertake drawdown until their death.
If you would like advice on the most suitable retirement options, please give us a call or email an enquiry contact us