New rules for drawdown (Unsecured Pension) came into force on 6th April 2011 formally ending the effective compulsion to buy annuities by age 75 and abolishing Alternatively Secured Pensions (ASP). The new rules create two new types of Drawdown
Drawdown allows you to make income withdrawals direct from your pension fund instead
of buying an annuity.
Until June 2010, at the age of 75 you had either buy an annuity or transfer to an Alternatively
Secured Pension. From June 2010 this effective compulsion to buy an annuity was scrapped and was replaced in April 2011 by Flexible Drawdown and Capped Drawdown and Flexible Drawdown.
Drawdown has many advantages but the most important are; income flexibility, investment control and choice of death benefit
The basic rules for drawdown are simple, but it is a complex option because
of the risks involved. When you buy an annuity you give up control of your
pension fund in return for a secure income. With drawdown you maintain control
of the pension fund but your income will not be secure and so it is a much
more risky option than buying an annuity.
Those who can show that they relevant income in excess of the Minimum Income Requirement, currently £20,000 per annum, can elect to enter flexible drawdown.
This means that unlimited income withdrawals can be made from the pension fund.
The MIR includes any state pensions that are in payment, lifetime annuities including level annuities, and scheme pensions.
Drawdown income and purchased life annuities are not classed as relevant income.
The MIR will be reviewed every 5 years.
Any payments will be taxed as income as the marginal rate
There will be no review periods
No furher pension contributions will be allowed once in flexible drawdown
Protected rights benefits are not permitted in flexible drawdown.
This will be the drawdown option for those who have less than £ 20,000 of secured income and will allow drawdown without any age restrictions
Although it might be prudent to purchase an annuity as you get older, there is no compulsion to do so.
The amount of income that can be paid from a capped drawdown is determined by reference to tables produced by the Government Actuary's Department (GAD). The maximum income in any one year is roughly equal to a single life annuity and there is no minimum income requirement.
To ensure that the income limits from drawdown are in line with annuities
the limits are calculated by reference to current gilt yields. GAD produces
a set of special tables based on a range of interest rates.
There is a compulsory review every three years to ensure that the pension fund can sustain future income payments. At the review the maximum income limits are set for the next 3 years.
Income can be varied each year so long as it is kept within the GAD limits.
Income withdrawals can be paid monthly, quarterly, half yearly or annually and can be in advance or arrears.
This website is run by William Burrows, is for information only and does not provide specific financial advice.