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A flexible addition to the drawdown stable

This article is part of
Guide to Flexible Drawdown

Flexible drawdown was introduced in the Finance Act 2011 and allows an individual to withdraw unlimited amounts from their pension fund, including total withdrawal of the fund.

It is an income facility available for money purchase pension savings, subject to meeting certain government dictated criteria.

Anyone making withdrawals under flexible drawdown has to show they have pension income of at least the minimum income requirement. The MIR was set at £20,000 a year and can include income from a variety of prescribed sources.

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HM Treasury sets this figure on the assumption that it is sufficient to prevent someone falling back on state benefits. It will be reviewed no later than 2016.

For those unable to meet the MIR, the only drawdown option available is ‘capped drawdown’. This was initially set at 100 per cent of the government actuarial department rate, to keep it in line with a single life annuity purchase, but this has since been revised back to mirror the previous 120 per cent rate available under unsecured pension.

Flexible drawdown withdrawals will be subject to income tax in the normal way.

Drawdown itself is nothing new and those approaching retirement have had the option of income drawdown since 1995.

In the last 18 years, Mike Morrison, head of platform marketing of AJ Bell, states income drawdown has offered a real alternative to annuity purchase, allowing a retiree to draw an income from their pension fund while leaving the fund invested.

“Normal or ‘capped’ drawdown sets a maximum that can be drawn each year, in line with pre-published rates (GAD rates) that can fluctuate and which are linked to gilt yields.”

Flexible drawdown works roughly in the same way as capped drawdown, according to Alastair Black, head of customer income solutions for Standard Life, albeit with some differences.

“Income withdrawals are made directly from the pension fund, with the remainder of the fund staying invested which gives it the opportunity to keep growing.

“The key thing with flexible drawdown is that there is no limit on how much you can withdraw. In essence, it is uncapped drawdown. In theory, this means that the entire value of the pension fund could be withdrawn in a single payment.”

Adrian Walker, retirement planning manager of Skandia, notes: “Flexible drawdown enables clients to avoid the income available to them being determined by external market factors such as gilt yields and annuity rates.

“It provides a way for a client to use their money purchase pension savings to provide required income without the limitations imposed through other pension income options.”