Drawdown and Phased Retirement
Pensions traditionally paid any tax free cash that was due at retirement whilst the remaining money passed to an annuity provider to pay a fixed lifetime income (see 'Annuities'). This security comes at a price as a traditional annuity demands that you take irreversible decisions regarding the level and frequency of income; inflation protection and dependent benefits. Many are dissatisfied with arrangements whereby they cannot change their income, any future investment growth is foregone and their capital lost upon death.
Increasing numbers of clients prefer to retain control of their pension themselves and draw income and, or tax free cash directly from their account as required. This approach allows income to be drawn to suit changing income needs and if the fund appreciates you benefit. Drawdown may not be attractive throughout retirement and the remaining fund may be used to purchase an Annuity at any time.
The Chancellor announced far greater flexibility for Drawdown from 6 April 2015. A summary of some of the features is given below; please bear in mind these changes do not apply to final salary/defined benefit schemes.
Retirement Age - Retirement benefits will usually be available from age 55.
Tax Free Cash - Tax free cash is usually limited to 25% of fund value.
Phased Tax Free Cash - Tax free cash need not be taken at once and may be taken in stages (Phased Retirement).
Income Flexibility - Income may be drawn from your pension at whatever rate you choose although it is still subject to Income Tax at your marginal rate. Potentially, the whole fund could be drawn at once although this may not be attractive due to tax.
Provision For Spouse and Dependents If You Die Before 75 - Provision of income for your spouse is simple with a Drawdown account as if you were to die before them they could continue to draw income from the fund (tax free) or use any remaining money to purchase an annuity. If you die prior to age 75 any money left in the account may also be paid as a lump sum to whomever you choose entirely free of tax.
Provision For Spouse and Dependents If You Die After 75 - If you die after age 75 your spouse may continue to receive income by Drawdown or purchase of an annuity. Alternatively a lump could be paid to the next generation subject to tax at their marginal Income Tax rate. More interestingly, the remaining fund could also be paid out as income to any number of your loved ones and be subject to Income Tax at their rate of tax. This option gives great flexibility to settle income on those paying low rates of tax and assist younger members of the family after our death.
Transfer To Annuity – This is available at any time allowing income to be secured.
Continued Investment Participation – When income or tax free cash is drawn it is deducted directly out of the pension account but any remaining money is free to continue to grow and will appreciate – if investments go up, which is not guaranteed.
Restricted Future Pension Contributions – If you take income using Flexi Access Drawdown your potential for future pension payments will be restricted as your Annual Allowance will be reduced to £4,000.
Drawdown is a higher risk strategy as compared to annuity purchase as ongoing income levels rely on future investment performance. If the funds decreased significantly in value, your income could reduce dramatically. It should also be remembered that if an annuity is secured in the future there can be no guarantee that the annuity rates will be favourable. Drawdown is usually only suitable to those with an available fund of at least £100,000 and other assets and, or income in the background.
Although pension legislation will offer these new choices many providers will not be providing the new facilities. We can assist you in assessing your retirement choices and reviewing the suitability of your current pension providers and other arrangements for your preferred route. Drawdown is a sophisticated product and the investments and levels of payment need to be reviewed regularly.
Assets Financial Services has provided advice on Drawdown since its introduction in 1995 to clients in Brighton, Hove, Sussex, London, Reading and the South East. This is an area of particular expertise for our practice and all advice is independent and provided by a Chartered Financial Planner. We would love to hear from you please contact us now to discuss your situation without cost or obligation.
Increasing numbers of clients prefer to retain control of their pension themselves and draw income and, or tax free cash directly from their account as required. This approach allows income to be drawn to suit changing income needs and if the fund appreciates you benefit. Drawdown may not be attractive throughout retirement and the remaining fund may be used to purchase an Annuity at any time.
The Chancellor announced far greater flexibility for Drawdown from 6 April 2015. A summary of some of the features is given below; please bear in mind these changes do not apply to final salary/defined benefit schemes.
Retirement Age - Retirement benefits will usually be available from age 55.
Tax Free Cash - Tax free cash is usually limited to 25% of fund value.
Phased Tax Free Cash - Tax free cash need not be taken at once and may be taken in stages (Phased Retirement).
Income Flexibility - Income may be drawn from your pension at whatever rate you choose although it is still subject to Income Tax at your marginal rate. Potentially, the whole fund could be drawn at once although this may not be attractive due to tax.
Provision For Spouse and Dependents If You Die Before 75 - Provision of income for your spouse is simple with a Drawdown account as if you were to die before them they could continue to draw income from the fund (tax free) or use any remaining money to purchase an annuity. If you die prior to age 75 any money left in the account may also be paid as a lump sum to whomever you choose entirely free of tax.
Provision For Spouse and Dependents If You Die After 75 - If you die after age 75 your spouse may continue to receive income by Drawdown or purchase of an annuity. Alternatively a lump could be paid to the next generation subject to tax at their marginal Income Tax rate. More interestingly, the remaining fund could also be paid out as income to any number of your loved ones and be subject to Income Tax at their rate of tax. This option gives great flexibility to settle income on those paying low rates of tax and assist younger members of the family after our death.
Transfer To Annuity – This is available at any time allowing income to be secured.
Continued Investment Participation – When income or tax free cash is drawn it is deducted directly out of the pension account but any remaining money is free to continue to grow and will appreciate – if investments go up, which is not guaranteed.
Restricted Future Pension Contributions – If you take income using Flexi Access Drawdown your potential for future pension payments will be restricted as your Annual Allowance will be reduced to £4,000.
Drawdown is a higher risk strategy as compared to annuity purchase as ongoing income levels rely on future investment performance. If the funds decreased significantly in value, your income could reduce dramatically. It should also be remembered that if an annuity is secured in the future there can be no guarantee that the annuity rates will be favourable. Drawdown is usually only suitable to those with an available fund of at least £100,000 and other assets and, or income in the background.
Although pension legislation will offer these new choices many providers will not be providing the new facilities. We can assist you in assessing your retirement choices and reviewing the suitability of your current pension providers and other arrangements for your preferred route. Drawdown is a sophisticated product and the investments and levels of payment need to be reviewed regularly.
Assets Financial Services has provided advice on Drawdown since its introduction in 1995 to clients in Brighton, Hove, Sussex, London, Reading and the South East. This is an area of particular expertise for our practice and all advice is independent and provided by a Chartered Financial Planner. We would love to hear from you please contact us now to discuss your situation without cost or obligation.