From the 6 April, more of the clients not annuitising (many) and not taking their fund entirely in cash (hopefully relatively few) will move into the new ultra-flexible income drawdown regime.
Each client is very different, but FTAdviser asked some experts on how they might advise clients based purely on pot size, to get a general sense of where the dividing lines may be broadly drawn.
Reading between the lines on comments from many experts and even the regulator, some believe £50,000 could be a cut off. Sheriar Bradbury, managing director for Bradbury Hamilton, believes that there is potential for Fad to be valuable at this pot size.
This is because, he says, it offers the potential to take out a tax-free cash lump sum at any point after age 55 and continue potentially to obtain tax relief on topping up pension plans, “which is very useful for a higher rate taxpayer”.
David Trenner, technical director at Intelligent Pensions, says that generally speaking the average client will have £100,000 or more plus other assets to use drawdown and that this will not really change post-April.
For those with larger pension pots in excess of £100,000, Fad allows those heading towards retirement to work less and supplement earnings by taking an income from their pension once they are in a lower tax rate if they wish, Mr Bradbury says.
Pot size: £50,000
Rebecca Colley, operations director and chartered financial planner at Informed Financial Planning, gives the example below of a case study of someone who wishes to go into Fad with a £50,000 pot.
Clive, aged 63, is thinking about retiring. He is aware his state pension, which equates to £144 per week, is not payable until age 66. He also has some final salary benefits with an old employer payable from age 65 equal to £9,000pa and a stakeholder pension worth £50,000.
It is clear that from state pension age Clive will have sufficient income to provide for his ongoing expenditure (which is around £15,000pa), as both the state pension and final salary benefits are escalated annually in line with inflation.
Under Fad, Clive could choose to use the stakeholder pension to provide him with income from now until his state pension is payable. The fund would simply be moved to a drawdown provider and the required income of £15,000 could be taken as part tax-free cash and part income to maximise tax efficiency annually or monthly.
Utilising the rules to provide flexible income to allow early retirement is something we are already seeing as a benefit to the rules change. Under the old rules Clive would not have been able to access £15,000 from a £50,000 pot and therefore would have continued working until state pension age.
Pot size: £100,000+
Mr Trenner gives an example below of how various drawdown options can be used for a £150,000 pot.
John is a higher rate taxpayer who has £150,000 in his pension fund. He wishes to access £20,000 cash to buy a new car, but does not want any income as he is still working.