At retirement you have the option to move into Income Drawdown, rather than take an annuity. Drawdown is where your pension fund is still invested, however you are able to take an income from it at the same time. This way it can still grow (or decrease), but will give you far more flexibility than an Annuity which is a fixed income, agreed at outset and cannot be changed once the terms have been agreed. With Income Drawdown you can still buy an annuity with the fund value in the future if your circumstances change.
There are two forms of Income Drawdown – Flexible & Capped.
Flexible Drawdown will allow you to take an income to suit your needs at the time. This is especially good for clients in their early retirement because they might have used their Tax Free Cash paying off their mortgage but still want to do a World Cruise or climb a mountain before they get too old. So if you have a minimum Secured income of over £20,000 per annum you can take a Flexible Drawdown which will mean that you can take what income you like at the time that you need it. You could take the whole fund in one go – but bear in mind this might not be the best best option for you as you would be taxed on the income in that tax year.
With Capped Income Drawdown you are restricted by the amount of income that you can take in any one year and these restrictions are set by GAD (Government Actuary’s Department). Please call me on 01753 626866 if you like to know the figures.
Example Client – Malcolm had a fund value of £240,000 aged 64 and needed to have some cash to complete some home improvements. He moved his pension fund into Income Drawdown so that he could access the 25% cash i.e. £60,000 for the home improvements. He did not require any additional income at the time as he was still working and earning £45,000 a year which was enough for his needs and if he had taken an income he would have paid 40% tax on it. A year later he decided to retire aged 65 and his State Pension paid him a combined £14,000 per annum along with an Occupational scheme he had of £7,000 per annum. This gave him the minimum secured income that he needed be able to move into Flexible Drawdown. However he wanted to help his daughter buy her first property and she needed to top up her deposit by £18,000 to get the property she wanted. Based on Capped Drawdown, he would only have been able to take an income of £10,368 from the £180,000 fund. But as he was eligible for Flexible Drawdown he could take the £30,000 in that year (£30k less 40% tax = £18K). It did mean he paid some higher rate tax, but it allowed him to help out his daughter. He then reduced the income he needed per annum down to £3,000 the following year, because his outgoings only amounted to £24,000 per annum. This £3,000 income that he needed from his Drawdown, divided by his remaining fund value of £150,000 meant that he only needed a 2% return (net of charges) to maintain his fund value for his future retirement. It also meant that he was able to leave his remaining pension fund to his daughter on death (less a tax charge) as well as his man residence.
This would not have been possible with an annuity and he still has the option to buy an annuity if needed in the future. Obviously the value of investments can go up as well as down and for small value pension funds we do not normally recommend the Drawdown route.
If you would like some advice please call me on 01753 626866. You can find a lot more information at our website www.gileswarren.co.uk
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