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New legislation allows for higher pension payments than currently available in income drawdown. This new way to increase the amount you take from your pensions is termed Flexible Drawdown. As the name suggests this option is much more flexible than income drawdown. Qualifying for this option removes the cap on the income you can take.
However not all pension providers are able to provide a flexible drawdown option.
With Flexible Drawdown – there are no income limits at all and you can draw as much income as you like when you like. However flexible drawdown will not be available to everyone and there are certain criteria that must be met before you can choose it.
The following criteria have been set out by the government to ensure investors can enter flexible drawdown with sufficient secure income in place to help prevent money running out later in retirement.
- You must already have a secure pension income of at least £20,000 a year in place. This can include your state pension, an annuity or a company pension. Investment income doesn’t count. Pension pots not needed to provide the £20,000 could be taken as flexible drawdown. Remember – pensions can be split, with part used to buy an annuity to secure the necessary income and the remainder taken as flexible drawdown. You must receive at least £20,000 of pension income in the tax year you enter flexible drawdown.
- It isn’t possible to take flexible drawdown from a protected rights pension (money from contracting out of the State Second Pension or SERPs). Protected rights are expected to be abolished in April 2012 which will effectively remove this restriction.
- Flexible drawdown can only be taken once you have finished saving into pensions. If pension contributions have been made to any pension in the same tax year or if you are still an active member of a final salary scheme, it isn’t possible to start flexible drawdown. Once in flexible drawdown it isn’t possible to make further pension contributions.
As you can imagine most people with pensions will not be able to qualify or secure £20,000 of pension income, so as to be able to go into Flexible Drawdown.
The majority will therefore decide to go into the normal capped drawdown “income drawdown” or choose to buy an annuity.
There is a little known but important alternative to capped drawdown for those seeking to maximise pension funds.
A small group of specialist pension providers offer another option, called “scheme pension”.
Under Special Pension rules an actuary can calculate the amount you can draw based upon your life expectancy.
A retiree age 65 with a £100,000 pension fund might only be able to draw £6,600 from a capped drawdown pension but under scheme pension could draw a range of income depending on state of health. Good health £7,835 to very poor health £9,917.
Do you have a question on any aspect of tax planning, retirement planning or financial planning? then e-mail us