My normal retirement age is looming and I would like to start drawing benefits and take some cashflow pressure off my company. I do not wish to purchase an annuity.
One adviser has been telling me that I must transfer to another type of scheme for the most flexibility but I always thought I could draw my pension direct from my current scheme. Is this true?
It has always been possible to draw benefits from a small self-administered scheme without purchasing an annuity at the outset.
For many years, scheme trustees had a five-year window in which to secure an annuity, the idea being that this would allow them to delay the decision in order to benefit from optimal terms.
In the early 1990s, the Inland Revenue came under increasing pressure from advisers and pensioner trustees to allow a longer window of opportunity for annuity purchase.
This is because annuity rates had fallen and the hope was that, by deferring the purchasing decision for longer, the trustees would be able to take up annuities once the market had calmed down again.
In 1994, the Inland Revenue allowed SSAS trustees an additional option of deferring annuity purchase until age 75.
It also introduced the idea of an annuity certificate to be prepared by the actuary of the SSAS. The certificate would indicate the amount that could be provided by the SSAS through annuity purchase at that time and the member's pension should be taken at that level or thereabouts.
This move left personal pension planholders out in the cold and the industry made further representations to the Inland Revenue to permit annuity deferral. Eventually, the Inland Revenue conceded.
Pension drawdown, as this became known, was considered more flexible than SSAS drawdown for two principal reasons. First, the pension could be adjusted regularly within broad upper and lower limits, while SSAS drawdown required a stable pension.
Thus, pension drawdown was more appropriate for pensioners who needed to manage their income, perhaps for tax reasons or because of other sources of income.
Second, death benefits could be paid as a lump sum, less a tax charge. There was no such option on SSAS drawdown where the main death benefit was in the form of a spouse's/dependant's pension.
This clearly swung the pendulum back in favour of pension drawdown. It is now quite common for SSAS members to transfer funds to a personal pension plan before benefits commence and then take drawdown from the personal pension plan, principally for the reasons set out above.
The position has now been made more complex as, last year, the Inland Revenue introduced a further variant for SSAS drawdown. Briefly, this mirrors to some degree current pension drawdown laws in that it permits a pension to vary broadly within upper and lower limits, thus eliminating the first advantage given above for pension drawdown.
However, the death benefit position is unchanged and personal pensions still offer greater flexibility in the form of death benefits.
A further issue, which to my mind can be very significant, is that of surplus. Personal pension plans do not normally have a surplus risk – it can happen in certain circumstances on death but this is a rare occurrence. So, if a drawdown fund performs particularly well, there is no Inland Revenue limit on the amount of pension the pensioner can receive.
Conversely, with an SSAS, the Inland Revenue limits on pensions still apply and healthy investment performance could conceivably generate a surplus in due course, with a member unable to benefit from the full fruits of the superior performance. If your SSAS is well funded and you intend to take a relatively aggressive investment stance, this is a quite powerful impetus for looking at a transfer to a personal pension before drawing benefits.
If this is of interest to you, I would strongly recommend that you look at a transfer to a personal pension as a matter of urgency.
A funding test is applied to transfers from an SSAS to a personal pension plan which is intended to eliminate transfers in cases where the SSAS is too well funded.
At the moment, the funding test is fairly generous. However, the Inland Revenue has introduced draft regulations which, if brought in, would severely restrict the amount of fund that you could transfer.
If you are serious about looking at pension drawdown, you should take professional advice as soon as possible to avoid the possibility of having that option removed abruptly.