What is Flexible Drawdown?
Flexible drawdown allows those with secure incomes over £20,000 per year to take unlimited amounts of income from their pension funds, but this will be taxed at their marginal rate. It is available for individuals aged 55 or over who meet the government’s minimum income requirement (MIR). The MIR is currently set at £20,000 per annum and the government has agreed this is the minimum guaranteed amount of income required by the individual. In essence, this process permits those individuals who feel they are adequately provided for by their pension schemes to withdraw any further pension funds, subject to them meeting the minimum level of guaranteed income.
Eligible individuals are able to withdraw, as and when, as much or as little money as they require, from their pension funds. Withdrawals are treated as income for tax purposes and individuals should always assume that the withdrawal will be taxed at the basic rate of tax or higher. This is because the individual concerned will always be in receipt of the income covered by the minimum income requirement and therefore, at minimum, they will be a basic rate tax payer from the onset.
Whilst flexible drawdown is available to any individual who meets the minimum income and age requirements, it may be of particular interest to higher rate tax payers who believe they will meet the MIR at retirement but will become basic rate tax payers later. As it currently stands, these individuals would be able to withdraw surplus funds up to the higher rate tax bracket per annum and would therefore benefit from the differential between the two tax brackets; having paid into their pension as a higher rate tax payer whilst employed to then withdraw the money as a basic rate tax payer after retirement.
To avoid wide-spread abuse of this differential, the rules of flexible drawdown state that individuals who use this mechanism can no longer get tax relief on further pension contributions.
Meeting the Minimum Income Guarantee
Income sources eligible to form part of the minimum income guarantee include:
- State Pension Benefits – Basic and Additional
- Pension Annuities
- Occupational Pensions (under certain circumstances)
Purchased life annuities, certain occupational schemes, certain state benefits and drawdown income do not count towards MIR.
Rules for Flexible Drawdown
The individual must meet the following criteria to be eligble for flexible drawdown:
- Have eligible sources of income to meet the minimum income guarantee [currently £20,000]
- No longer contribute (either in person or via a third party) to a personal pension scheme.
- Not build up further benefits in a final salary (or cash balance) scheme.
- Must be 55 years of age or over.
- Provide a satisfactory declaration to the pension provider concerned that they meet the above conditions.
Like all drawdown plans, individuals who utilise flexible drawdown are also able to take 25% of the drawdown as a tax-free amount. In the event of death, your surviving spouse/dependants would have four options:
- Take the fund remaining on death as a cash lump sum less a one-off 55% tax charge.
- Use the fund remaining on death to purchase a lifetime annuity or,
- Continue in Income Drawdown, with the maximum income allowance based on their age and sex, or
- If applicable, defer the purchase of a lifetime annuity until they reach age 60.
No Inheritance Tax (IHT) will typically apply to lump sum death benefits either before or after age 75. Where there is no dependent it will be possible to pay the lump sum death benefit tax free to charity.
THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.
INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM TAXATION, ARE SUBJECT TO CHANGE.