Pension Drawdown (Unsecured Income Plans)

As explained in the introduction of Retirement Choices you can still take benefits from your pension funds, from age 50 onwards, without immediately buying an annuity. From 2010 this minimum age will be raised to 55.

From the time of taking benefits until you reach 75 you can use Pension Drawdown to take both tax-free cash and an income directly from your pension fund. The fund remaining after taking tax-free cash is still invested as a pension fund, continuing to benefit from a tax efficient environment in the same way that it did prior to taking any benefits.

On transferring to a Pension Drawdown (Unsecured Income) plan, you can immediately take a tax-free lump sum up to a maximum of 25% of the fund value and then take an income from the invested fund up to a limit prescribed by the Inland Revenue. It is not compulsory to take any tax-free cash and you can take a lesser amount than 25% if you wish. However the tax-free cash must be taken at the time that the plan is set up.

Since the changes to pension regulations on 6^th April 2006 there is now no minimum income level, and so you need not take any income if this is not needed or desired, perhaps for tax reasons. The maximum annual income that you can take is set by the Government Actuaries Department. You can, therefore, take any level of income between zero and the maximum on a yearly basis. You can vary this income at any time, meaning that one year you could take nothing at all and the next the maximum.

Every five years this maximum level has to be reviewed and can increase or decrease depending on a combination of the fund value, your age and the GAD rate at that time. There are proposals to allow annual reviews at the instigation of the member.

Investment of your funds

Setting up a Pension Drawdown plan is only the start of an ongoing situation, which can continue until you are 75.

The pension fund that remains after taking tax-free cash is invested in any investment fund that is offered by the provider of the plan. These funds are likely to cover all investment markets and will include both funds managed by the provider itself and also external funds such as unit trusts. These funds will cover all investment classes, i.e. UK equities, both growth and income, overseas equities, commercial property, fixed interest, corporate bonds and gilts. These funds can be changed (switched) between any of the funds that are available and with some providers at no cost.

Therefore the selection and managing of your investment funds within the Drawdown plan is just as important as selecting the right plan and provider at the outset.

Before investment funds are recommended your “Attitude to Investment Risk” is ascertained, which would determine whether you were a Cautious or Adventurous investor, or anywhere in between. Any recommendation that we might make would be in accordance with this.

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