Greater access to drawdown products was immediately granted in this year’s Budget – with chancellor George Osborne promising even more ways to grab your cash next year.
Up until Budget 2014 and following changes introduced in 2011, there were two options under drawdown rules:
1. Capped drawdown: Limited the amount of income that could be withdrawn by a retiree to 120 per cent of the GAD rate. This was actually capped at 100 per cent prior to the Autumn Statement announcement in December 2012.
2. Flexible drawdown: No withdrawal limit but limited to certain retirees. Only retirees who had at least £20,000 a year of secured pension income from other sources such as state pension, final salary schemes or annuities could access.
Shortly after the Budget, the income limit on capped drawdown was raised from 120 per cent to 150 per cent of an equivalent standard annuity, and the threshold for flexible drawdown was reduced to £12,000 a year.
Martin Lines, head of business development at Partnership, says the changes to the minimum income requirement means that a client needs to have a guaranteed £12,000 income from sources such as the state pension, scheme pension or a lifetime annuity before they can use flexible drawdown.
Subject to consultation from 6 April 2015, even these more generous limits will wash away and anyone will be able to take as much from their pension fund as they wish, subject only to income tax rates on the amount above the 25 per cent tax-free lump sum.
While taking more than the capped rate previously might have resulted in a 55 per cent tax charge, our experts say this looks set to be scrapped.
It remains unclear whether the new rules will effectively be an extension of the current rules under drawdown or whether, as some have called for, rules delineating different retirement income regimes will be abolished.
With increased flexibility, David Fox, sales and marketing director of Dentons, says whatever option an adviser recommends the need to plan and make sure future income needs can be met is still paramount.
In addition Mr Fox says an individual’s marginal rate of tax needs to be considered when drawing down funds.
He says people may be tempted to draw additional funds from a tax efficient pension fund and invest them in potentially less tax efficient and costly assets, such as buy-to-let.
Mr Fox says: “The initial excitement about being able to drawdown your full pension may be because there was little understanding of what taxed at ‘marginal rate’ actually means.”
