Generating Retirement Income

Generating retirement income has now become even more flexible.

From 6 April 2011 new rules, which were introduced to replace the previous pension drawdown arrangements, have now provided individuals with greater flexibility and control over their pension options when they retire.

“Flexible drawdown” is more flexible than the previous income drawdown vehicle and by qualifying for this option it removes the cap on the income you could take. This will not be available to everyone though and there are certain criteria that must be met before you can opt for it.

Flexible drawdown allows some individuals the opportunity to withdraw as little or as much income from their pension fund as and when they need it. To qualify you have to declare that you are already receiving a secure pension income of at least £20,000 a year and have finished saving into pensions. The same rules apply to dependants who elect flexible drawdown.

If pension contributions have been made to any pension in the same tax year, or if you are still an active member of a final salary scheme, it isn’t possible to start flexible drawdown and once in flexible drawdown, it isn’t permissible to make further pension contributions.

A secure pension income means an occupational (company) pension, being paid to you either from the UK or from overseas; or an annuity being paid to you (from a personal pension or company pension) either from the UK or from overseas; or a State pension being paid to you either from the UK or from overseas.

The effective compulsion to buy an annuity by age 75 has ended and you now have more flexibility to defer taking a pension and tax-free cash payments post age 75.

There has, however, been an increase in the tax payable on lump sum death benefits from drawdown, whereby tax is now charged at a flat rate of 55%, rather than the previous rate of 35%

These new rules, with the exception of the increased tax on death payouts, could benefit those who do not want to buy an annuity, or who want more flexibility and control over their retirement income. Although in practice, the majority of people may still want to purchase an annuity in retirement, because it enables them to secure a guaranteed income.

These additional choices mean that whilst selecting the most appropriate route to generate that vital retirement income has become more flexible, it is yet more complex, meaning that obtaining the right advice is even more important.

Paul Dickson
Managing Partner

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