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The retirement income balancing act

In recent months, as gilt yields have fallen and annuity rates have dropped, there has been a lot of debate about whether annuities or drawdown provide the better outcome for retirees.

However, it need not be a case of annuities versus drawdown as there is scope for them to live alongside each other.

With life expectancy and the number of years people spend in retirement rising, it is crucial for clients to maximise their income. As a result, we focus on ways to encourage clients to not only shop around for their annuity, but also to disclose any health conditions or lifestyle impairments that could help them receive an enhancement.

As the length of retirement has increased it also makes sense to offer clients flexibility as to how their income is structured.

Unlike an annuity which provides a structured, regular income, flexible drawdown offers clients the opportunity to draw whatever income they like from their pension each year.

Anecdotal evidence indicates that clients who combine an annuity with flexible drawdown value the ability to access more of their cash whenever they want, with many using their fund to make purchases that their regular monthly annuity payments won’t cover.

We also see clients using it as an effective tax planning tool – taking additional income but turning off the “income tap” before they reach the higher rate tax threshold.

Despite the value these products can offer, flexible drawdown is often not mentioned as a choice for clients.

From conversations I have had with advisers, it is clear that drawdown is still perceived as the preserve of clients with substantial pension funds. However, the advent of flexible drawdown has made it much more accessible and a serious option for many more clients.

For a client to be eligible for flexible drawdown they need to meet the £20,000 minimum income requirement. Due to the MIR, many advisers disregard it as an option for a client. Although an £20,000 MIR might sound rather high, there are many that would qualify.

Industry figures indicate that there are more than 200,000 people who meet the MIR and have defined contribution pension schemes, with teachers amongst those likely to fit the criteria.

In fact, if your client has mixed retirement income benefits (i.e has final salary pension and has switched to money purchase or has a final salary pension and is paying into a money purchase additional voluntary contribution scheme) it is worth them taking the MIR test.

Clients may not be aware that their basic state pension counts towards the minimum income requirement, so it is possible that even those who qualify may answer negatively when asked whether their pension income equates to £20,000.

Income from the following all count towards the minimum income requirement:

  • The state pension (including state widow’s benefits and similar pensions paid by other countries)

  • A scheme pension or dependents scheme pension being paid as an annuity

  • A scheme pension or dependents scheme pension being paid from a scheme where there are 20 or more members similarly receiving a scheme pension (including pensions being paid from a final salary or defined benefit scheme)

  • Lifetime annuities, including with-profits or investment-linked annuity

  • Certain overseas pensions

  • Any compensation payments being received from the Payment Protection Fund

  • Any compensation payments being received from the Financial Assistance Scheme

What size pension pot do you need to fund the MIR?


As a guide to provide an income of £14,410 (£20,000 MIR less the basic state pension of £5,590) for a male, age 75 in good health, a pension pot of around £180,000 is needed.

If a client just falls short of the MIR, it is worth assessing whether they would fulfil the MIR if they waited a year or two. Potentially a viable option if one of the sources of income increases every year i.e most final salary scheme or state pensions. Alternatively, it is possible for them to annuitise enough of their pot to make up the MIR shortfall, leaving the client free to receive the rest for the funds as cash.

Most clients will be planning to annuitise their entire pension fund, even if they might benefit from combining it with flexible drawdown.

To ensure that clients use the right solutions, there needs to be a shift away from the idea that a client’s health in a bid to maximise their income is the only factor that could improve their retirement. 


As an industry we need to widen the conversation to include a thorough assessment of clients’ pension pots and their longer term retirement plans.

Steve Lewis is head of retirement distribution at LV=

Better Retirement Group director Billy Burrows offers his view on why the take up of flexible drawdown has been modest:

Flexible drawdown was introduced in 2011 and although there has been a lot of interest from clients the actual number of completed cases has been relatively low

The relatively low take up of flexible drawdown can be explained by a number of reasons. First, many of the big insurance companies have not introduced flexible drawdown with the exception of Standard Life which introduced flexible drawdown last month. It was left to the more specialist Sipp providers such as James Hay and Sippcentre to lead the way and now there is a long list of Sipps that provide FD options.

Second, many clients simply do not qualify for flexible drawdown as they cannot meet the £ 20,000 p.a. guaranteed income threshold.

A client in receipt of the state pension will need to convert a pension pot of about £ 200,000 into an annuity in order to qualify for flexible drawdown whereas clients before state pension age will need to convert around £ 350,000 in order to meet the criteria.

Third, it may seem tempting to take large income payments from flexible drawdown but as income is taxed as the client’s marginal rate this is not so attractive in practice.

It seems that clients are taking advantage of flexible drawdown for three main reasons:

  1. To maximise income immediately

  2. To apply now but take income later

  3. To use flexible drawdown in conjunction with phased retirement

As already explained, option one is not so attractive when tax is taken into consideration, however, there may be a growing market for those with DB pensions paying over £ 20K p.a. wanting to take all of their money purchase pensions as income.

Option two should be attractive to many people because it seems to sensible to apply as soon as practically possible for two reasons; the need for formal three year reviews is removed and the rules could be changed in the future.

Option three is for those who take a more sophisticated approach and probably ranks as the most tax efficient and optimum way to take pension benefits.

In conclusion, flexible drawdown is an important and useful option but at present the preserve of the higher net worth clients. As time goes on and pension pots increase in size it will be relevant to more investors.

However, as the state pension age is pushed forward the start date for flexible pension may be also be pushed forward as many people will rely on the state pension as part of the £ 20,000 of secured income needed

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