Income Drawdown (or Unsecured Pension) is the name
given to the facility to continue to keep your retirement savings
invested and take an income each year rather than buy an annuity. This facility
can only be continued to age 75, at which time an annuity has to be
bought or the money transferred into an Alternatively Secured
Pension (ASP).
The income that can be taken from a drawdown arrangement can be
varied each year between a minimum and a maximum. The minimum is
£0 and the maximum is 120% of a pension calculated according
to tables produced by the Government Actuaries
Department (GAD). These tables are based on the amount your
fund would buy as an annuity based on your life only and with no
allowance for any future increase. The maximum amount needs to be
recalculated every 5 years.
Further information about these GAD tables is
available from the Revenue's website.
Tax Free Lump Sum
Taking a tax free lump sum is a once only event. If you
enter into an income drawdown arrangement, you can take your
tax free lump sum at the start or wait until you come to buy
your annuity. You cannot take a tax free lump sum more than
once.
The maximum lump sum you can take is 25% of the fund at the
time.
Taking a lump sum is not possible after age 75.
So, if you move from income drawdown into an alternatively secured
pension at 75, without having taken a lump sum, it will then be too
late.
Q & A's
It is a facility that allows an individual aged between 50 and
75 to defer the purchase of their pension from an insurance
company. An income is drawn from the fund, and the residual fund
remains invested. The maximum income that may be drawn is 120% of
the pension that could have been purchased calculated using
Government Actuary rates. There is no minimum. The pension must be
purchased at age 75.
The individual is able to choose to purchase the pension at the
time when pension (annuity) rates are favourable. If investment
growth is achieved on the residual funds together with the fact
that annuity rates increase with age, a higher pension may
ultimately be purchased than could have been secured at outset.
Also, many individuals are reluctant to purchase a pension from an
insurance company since the whole of the purchase price is not
returned on death, whereas under income drawdown the residual fund
can be returned (see next question).
No. An Income Drawdown policy is not able to accept
contributions.
A surviving spouse or dependant has three options:
- take a lump sum subject to 35 % tax
- continue income withdrawal
- purchase an annuity
Depending on the scheme rules/policy terms, a dependant's
pension may be deferred until a later date.
If investment performance on the fund remaining is poor, the
level of income payable may reduce. The level drawn is reviewed
annually. There is thus no guarantee that the pension ultimately
purchased will be higher than the amount that could have been
purchased at outset.
The administrator of the income withdrawal arrangement will
charge fees, often on a time cost basis, and there may also be
investment management fees, and thus the costs of these
arrangements can be high. Whilst it is difficult to be precise, it
is generally agreed that a fund should be at least £100,000
before income withdrawal is a viable option.
No, HM Revenue & Customs rules will not allow further
contributions to be made once the arrangement has begun.
Transfers are allowed from other Personal Pension Plans or
Stakeholder schemes. However, it will be up to the terms and
conditions of the transferring/receiving scheme whether or not a
drawdown arrangement can be transferred to another arrangement. If
a transfer is allowed, all the sums or assets held under a
transferring arrangement can only be transferred to a new
arrangement and not to an existing arrangement.
