New rules for Income Drawdown
Following the new budget changes of 2014, the amount of freedom and flexibility in how you decide to use your pension savings will come under even more self control. This could be a massive benefit to you, if used correctly.
The most important changes regarding your pension may be the ability to drawdown even more of your pension each year while still having the ability to invest the rest of it or the amount of money you have to guarantee as income each year before you are aloud to withdraw as much as you like. Each of these could benefit yourself depending on which certain criteria you meet and what your personal perferences are.
As has been the case for many years the ability to withdraw up to 25% as a cash lump tax free hasn’t been affected. The main changes will come in how you decide to take the rest of your benefits, e.g. flexi or capped drawdown.
So what are these new changes and how can they affect your pension for the better?
Firstly there are two types of drawdown, flexi and capped.
One of the main advantages of flexible drawdown is quite self-explanatory. It gives you as you have the ability to increase or decrease your level of income in line with any changes to your lifestyle.
Additionally, you can also choose where your money is invested. Plus, if your investments perform well the value of your pension fund will increase. On the other hand, if the market takes a downturn or your investments perform badly you will have less money available for the remainder of your retirement. Similarly, too many early withdrawals could mean a shortfall in later life. For this reason, many people choose to consult a financial planner for advice and a forecast of their future income before entering flexi-access drawdown.
Who is elegible for flexi-access drawdown?
Before the current changes came in to place in April 2015, the flexible drawdown was only available to pensioners with a guaranteed annual income of at least £12,000 making this very limited and not an option for all. The current rules have now changed; this has increase the amount of freedom you have when taking your pension by now allowing a wider range of people this opportunity. But with this year’s pension freedoms, everyone is now eligible for the new flexi-access drawdown regardless of the size of their pension pot. However, pension providers have no legal obligation to offer you access to flexi-access drawdown or any of the new freedoms.
If the flexi-access drawdown isn’t for you then this alternative option could be the perfect path for getting the most out of your pension. Before the latest changes, under the old rules per pension year you were permitted to withdraw up to 120% of an amount worked out by the government Actuary’s Department (GAD). Following the new rules the limit has now been raised up to 150% for any pension starting after the 27th of March 2014. This change enables you to withdraw more money from your pension each year if you wish to do so. This will however need to be checked with the rules of your scheme.
Who is eligible for capped drawdown?
The main disadvantage with capped drawdown is it is no longer available to new investors. However if you have one you can take capped (limited) withdrawals and still invest more then £10,000 per year. Furthermore, you are potentially able to invest new pension funds into one too.
It is also possible to convert from capped drawdown to flexi-access drawdown (to allow uncapped drawdown of funds).
What are your other options?
Drawdown is one of a number of options for accessing your pension at retirement. You can also make lump sum withdrawals, purchase an annuity or stay invested – or choose a combination of all three. This is an important decision that will affect your level of income for years, so ensure that you choose the best option for you.
If you have any queries or require further information please don’t hesistate to contact us through email or telephone.
Telephone: 01925 551833