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Income Drawdown

Income drawdown (technically known as Pension Fund With drawal) was introduced in 1995 as an alternative to annuity purchase for pension funds. It allows an income to be taken directly from the pension fund at any time from age 50 and annuity purchase to be delayed up until age 75.

It was hoped that Income Drawdown would provide a general method of overcoming falling annuity rates caused by low gilt yields. Unfortunately, drawdown is usually only appropriate to those with pension funds in excess of £200,000 after the deduction of any tax-free cash as it is quite complex to establish and administer. For those with a sufficiently large fund it offers a very useful alternative route.

On commencing Drawdown one can set a level of income that is drawn directly from your fund within a maximum and a minimum level. At the same time there is a one-off opportunity to draw your tax-free cash from the fund - this must be drawn at the outset, it cannot be taken later.

Drawdown will therefore allow immediate access to your tax free cash and generate an annual income, whilst deferring the purchase of an annuity. Your fund will continue to be invested and the income that you must withdraw directly is determined by the limits established by the Government Actuary's Department (G.A.D).

Please see GAD calculator for an idea of the current limits.

Death benefits Three options are available to your spouse if you die before the age of 75 while in a drawdown arrangement:

the remaining fund can be used to buy a single life annuity for your spouse; or
your spouse can continue to draw income, subject to maximum and minimum rules, up to age 75 or when you would have attained age 75 if earlier, at which point the residual fund must be converted into an annuity; or
the remaining fund can be returned as a lump sum, subject to a 35% taxation.
If your spouse is less than 60 at the time of your death, the purchase of an annuity can be deferred until age 60. During this deferral period the fund will continue to be invested.

Also, if your spouse chooses to continue with Pension Fund Withdrawal, this decision can be altered in favour of the return of the lump sum, less 35% tax, within two years of your death.

What's new? Phased Retirement for anyone (2016)

Phased retirement was introduced to add flexibility to drawing benefits from a personal pension. Basically, it divides your pension fund into one thousand little policies allowing you to draw the combination of tax-free cash and annuity income from each one separately. The concept is to encash (vest) the exact number of plans each year to meet a target income.

As most of the cash released comes from the tax-free cash element of the policy initially there is very little tax liability in the early years. Over the years the annuity element will rise and eventually this will provide the majority of the income.

The main advantages of the system is that it allows you to adjust your income levels at will in the early years and to leave most of the fund invested whilst drawing an income. Annuity purchase is thus delayed and spread over a number of years rather than taking place all at once. The concept is very flexible but the main disadvantage is that most of the tax-free cash is used to provide income and cannot be drawn as a lump sum.

These days phased plans are often combined with income drawdown to give the greatest possible flexibility but the administration of these plans can be complex. At age 75 any remaining funds that have not been vested must then buy their annuity (or tax-free cash.). Phased Retirement -

Frugal & Economic Lifestyle

Pensions & retirement in Great Britain

Retirement Income Options

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