Income drawdown is a flexible way in which income can be taken from a pension fund. Rather than handing your pension pot to an insurance company to purchase an annuity, your money remains invested. You can then draw an income at intervals that suit you; every month, quarterly, half yearly or annually. Normally 25% of the fund value can be taken as a tax free lump sum with the remainder of the fund used to provide income, which will be subject to income tax.
Income drawdown has become an increasingly popular option in retirement as an alternative to purchasing an annuity. This is partly due to changes in legislation that allow more flexibility as to how benefits are taken in retirement and also a result of the low annuity rates currently on offer. One perceived advantage of income drawdown is that any remaining pension fund at death can be passed on to beneficiaries, subject to applicable tax deductions. You can also continue to pay into a pension fund and benefit from tax relief until the age of 75.
You should remember that income drawdown, unlike an annuity, is not guaranteed for life. Whilst this approach puts you in control of your pension fund, the value of your fund may go down as well as up and you may not get back what you originally put in, meaning that you may need to vary your level of income depending on the performance of the underlying investments.
From 6 April 2015, James Hay Partnership clients can take drawdown as flexi-access drawdown. For clients already in capped drawdown before 6 April 2015, capped drawdown remains available or you can convert to flexi-access drawdown if you wish to do so.
The regulatory changes that took effect on 6 April 2015 mean that the limits on how much can be taken out of a pension fund have been lifted with the introduction of flexi-access drawdown. From the age of 55, you will normally be able to take 25% of your pot tax free as a pension commencement lump sum. You can then use the remaining fund to provide an income at monthly, quarterly, half yearly or annual intervals, which will be taxed at your marginal rate. Income requirements can be changed through James Hay Online.
If you were in flexible drawdown prior to 6 April 2015 you will have been automatically converted to flexi-access drawdown on 6 April 2015.
Under capped drawdown, the level of pension income can be selected each year, within certain limits. These are calculated using the Government Actuary’s Department’s tables. We will, however, provide details of how much can be taken each year. Capped drawdown is only available for those clients already in capped drawdown prior to 6 April 2015.
Income can be taken monthly, quarterly, half yearly or annually and in advance or in arrears. This can be varied at any time and ad hoc top-up payments can also be made on the first day of any month. Income requirements can be changed through James Hay Online.
We will calculate how much can be taken each year. If under age 75, normally the amount will be reviewed every three years. If 75 or over, the amount will be reviewed every year.
You can elect to convert from capped drawdown to flexi-access drawdown at any point. This can be done via James Hay Online - If you are not registered for James Hay Online, please click here.
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For further detail on how to access your pension funds click here.
Should you choose to take an income through drawdown you need to bear in mind the sustainability of your chosen income method. Changes in circumstances, taxation, the performance of your underlying investments and the length of time that you live in retirement will all have an effect on the income available from your pension.
James Hay Partnership does not provide financial advice. We do however recommend that before taking pension benefits you seek advice from an authorised financial adviser.
Also available is Pension Wise; a free and impartial Government service that offers people with defined contribution pensions who are approaching retirement free, impartial guidance about their retirement choices. You can receive Pension Wise guidance online, over the phone or face to face. Visit www.pensionwise.gov.uk or call either 0800 138 3944 or 0300 330 1003 (from outside the UK +44 20 3733 3495), if you wish to use this service.
The above information is based on our interpretation of current law and HMRC practice which may be subject to change in the future. James Hay Partnership does not provide financial advice. If you require advice you should speak to an authorised financial adviser.
The Money Advice Service has produced a brochure to explain your options at retirement.