Flexible drawdown was a major introduction in the post-retirement market, removing restrictions for over-75s and widening income options.
This was partly a reaction to historically low annuity rates but also recognition of changing income requirements in retirement.
With the promise of unrestricted access to crystallised pension funds, providers have been cautious. In particular, the costs of operating a drawdown plan are significant.
It is not obligatory to offer flexible drawdown and the prospect of a plan being set up one day and all of the funds drawn the next means that costs need to be recovered quicker.
Commercially, pension providers need to make a profit. This may be achieved by higher initial setting-up costs or by applying effective exit charges in the early years.
Flexible drawdown is in its infancy so how has it been received so far?
With an additional income tax rate of 50 per cent, many individuals are not as keen to take full withdrawal of their funds for a number of reasons:
- According to the Government, the higher rate is temporary, therefore a lower rate might apply in future
- Constraints on future pension savings for those in flexible drawdown should be considered carefully, as circumstances can change. Tax planning opportunities from registered pension schemes should be considered
- For those under 75 with significant pension funds, phased retirement has a very positive inheritance tax planning advantage over drawdown pension
- Crystallised funds still grow in a tax-advantaged environment, a significant consideration even though the fund may face a lifetime allowance test at age 75.
Some individuals may want to take advantage of flexible drawdown but cannot. Perhaps they do not meet the minimum income level (currently £20,000), their pension provider does not offer it or they have already had a contribution made to, or accrued benefits in, a registered pension scheme in the current tax year.
Flexible drawdown requires planning to ensure that the individual qualifies. If there is a shortfall in relevant income to satisfy the minimum income requirement, maybe with an annuity.
The minimum income requirement also means that income tax planning becomes a consideration in timing of the annuity payments.
In 2012, auto-enrolment starts so individuals in flexible drawdown who might be auto-enrolled into a workplace pension need to beware.
The flexible drawdown market is expected to grow rapidly and will play a key part in meeting society’s changing income needs.
Mark Pearson is business development director at Origen Financial Services