With the new drawdown regulations, I am concerned that the income I can take is going to be reduced. Are there any alternatives?
You are right in that from April 6 there were several changes made to drawing down income from a pension. What was originally called draw-down became unsecured pension and is now reverting back to being called drawdown. The normal route is now termed capped drawdown and in this case the pension reviews identifying the maximum income that can be taken are being shortened to every three years instead of five years. The maximum income available is also being reduced by around 20 per cent.
You ought to also be aware that in instances where you die while drawing down income before age 75 and the money moves to beneficiaries where a cash payment is to be made, the tax charge will now be 55 per cent as opposed to the previous 35 per cent. There is good news after age 75, however, in that the maximum amount of drawdown available will increase by around 10 per cent and that the previous draconian possible 82 per cent tax charge on the fund following death falls to the same 55 per cent.
It is, however, with the exciting introduction of and additional type of drawdown called flexible drawdown that there might be an interesting alternative for you. Say, you are currently receiving £8,700 a year in state pensions in your own name along with your occupational pension of £12,400 a year.
This means that you have a secured pension income in of over £20,000, which makes flexible drawdown available to you. If you now elect to take flexible draw-down, you will have access to as little or as much of the remaining fund as you want to take.
The only stipulation is it will be treated and taxed as income in your hands. This means if you wanted, you could take the whole of your fund, pay income tax on that fund and extinguish your pension. Naturally, before taking such a dramatic step, we have to look at many other consequences, not least personal taxation. If, for example, we are able to restrict your income to only that paid to you from your pension, then there will be around £19,000 available for you to draw as income that will only attract a 20 per cent income tax charge.
In addition to considering income tax, you will need to look at your health and wealth and the situation regarding inheritance tax.
We must not forget you will need to consider your wife’s situation. If you are the first to die, you will want to ensure that she has sufficient income and capital available in the most appropriate places.
We are told that the new laws take effect from April but the legislation has not yet been passed into statute. Several independent Sipp providers are already committed to providing flexible drawdown. However, there is still one hiccup and that concerns contracting out of the state second pension. We will not be able to use the fund created by contracting out for flexible drawdown until after April 6, 2012.
While on the subject of reduced income drawdown, you also need to be aware that should you at any stage decide to use any of your fund to buy an annuity, you can expect further change as a result of the European Court of Justice ruling concerning sex discrimination on financial products. This means you can expect annuity rates for men to become more expensive towards the end of this year.
Richard Jacobs is princial of Richard Jacobs Pension & Trustee Services