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Entering flexible drawdown and what qualifies for the MIR

This article is part of
Guide to Flexible Drawdown

Any individual who wants to opt for flexible drawdown must be able to meet certain conditions.

The conditions for the individual wishing to enter Flexible Drawdown are:

• Must be 55 years of age or more

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• Have eligible sources of income to meet the MIR (currently £20,000 a year)

• No longer contribute to a defined contribution scheme

• Not accrue further benefits in a defined benefit (or cash balance) scheme

• Must provide a satisfactory declaration to the pension provider, confirming they meet the above conditions

Acceptable sources of income for inclusion in the MIR are defined in government legislation.

According to Mike Morrison, head of platform marketing of AJ Bell, acceptable sources of income are state pension benefits, final salary pensions or scheme pensions with more than 20 pensioner members, and annuities purchased via a pension scheme.

“It is important to note that purchased life annuities and capped drawdown income do not count towards MIR, nor do dividends, rental income or other forms of investment remuneration.

“It is important to note that there is a requirement for the individual to receive an amount of at least the MIR in the tax year they enter flexible retirement, so it is important to ensure that this amount is received at the appropriate time.

According to Mr Morrison, flexible drawdown could be suitable for:

• Individuals with large pension funds, such that they can buy an annuity of £20,000 a year and then draw the residue as they require

• Individuals in defined benefit schemes who can meet the MIR but also have other benefits, for example, additional voluntary contributions (AVCs), personal pensions, etc, which can then be taken free from GAD rate restrictions

• Individuals with significant other financial assets

Adrian Walker, retirement planning manager of Skandia, says while flexible drawdown can be applied for immediately from cessation of final salary scheme membership, advisers should remember it is not just the individual who has to meet government requirements.

According to Mr Walker there are a number of conditions for the pension scheme to meet too. He said Flexible Drawdown can only apply to funds held in money purchase pensions.

Mr Walker warns another restriction was not all pension schemes offer flexible drawdown as an income solution.

“So clients may need to seek advice to transfer their existing money purchase savings to a pension scheme where flexible drawdown is available.”

Dependent on the offerings available in the marketplace, Adrian Walker, retirement planning manager of Skandia, states they can phase in taking income from uncrystallised funds to provide income on a short-term basis adjusting the need to use their pension savings as their retirement income circumstances change.

“The amount they can extract from their pension savings to meet short-term income needs is not controlled by legislation other than by them meeting the minimum income eligibility requirements.”