Income Drawdown – A Guide
If you decide not to purchase an annuity immediately you have the option of income withdrawal,sometimes referred to as income drawdown. This is when you take your pension benefits directly from your SIPP rather than buying an annuity. For this option it is important to note what you are permitted by HMRC to take as an income, your death benefits and taxation treatment are all very different depending on whether you are aged under or over 75.
Unsecured Pension
If you have not yet reached your 75th birthday you may take an Unsecured Pension (USP). As the name suggests, the income you get is not secured (or guaranteed) as it would be with an annuity. This is because you are not committing a fixed amount of your pension fund to an You can decide, within limits set by the Inland Revenue, how much you take from your SIPP every year. You may increase your income, decrease it, stop taking it altogether or choose to purchase an annuity at any time. You may choose to take the whole or part of your fund into Your income is calculated using the Government Actuary Department (GAD) set standard annuity rates based on your age, and investment gilt yields at the time you take your benefits – an annual income, based on the amount of fund vested to provide benefits, and you may choose to take between 0% and 120% of this amount every year as a pension.
The annual income level is set for the next 5 years. You may choose to review it more often, but you don’t have to.
Advantages of Unsecured Pension:
- No need to set a level of income now – you have flexibility to increase or decrease as your personal circumstances change.
- You can use some of your fund to provide an income and leave the rest invested in a tax free environment. This is especially useful if you are going to move into retirement gradually and don’t need a full pension yet.
- You retain control over the SIPP investments.
- You have control over when or if you purchase an annuity, not being forced to purchase when rates are low.
- More choice in how death benefits can be paid, including under some circumstances a lump sum taxed at 35% or even tax-free if some segments remain unvested.
Disadvantages of Unsecured Pension:
- You retain the whole of the investment risk, if your investments do badly it could affect your income.
- As you stay in your SIPP you will continue to pay the SIPP charges, in addition to charges for administering the drawdown and the reviews.
- You don’t have the security of a guaranteed income.
- Annuity rates may worsen in future.
- The higher the level of pension you take from your fund, the better the rest of the fund must perform to ensure your pension benefits are not eroded away in the future.
- You have to have a formal review of the pension every 5 years and this may mean that your benefits could reduce.
Alternatively Secured Pension
Once you reach your 75th birthday you have to secure your pension. You do not have to purchase an annuity, you can choose to take an Alternatively Secured Pension (ASP). This The important thing to note is that you must take any PCLS before you reach age 75 or you lose the ability to take a tax free lump sum.
As for USP, a GAD annuity rate and the amount of fund used, to calculate an annual income of which you have to take at least 55% but no more than 90% as an income. The GAD rate we have to use is based on you being aged 75, even if you are older.
The death benefits that are paid out under a USP and an ASP are very different, and will have Inheritance Tax implications. You should not enter into ASP without professional advice.
Advantages of Alternatively Secured Pension:
- Most of the same advantages as under Unsecured Pension.
- You may leave any unused fund on death to a nominated charity, tax-free.
- If your spouse is aged under 75 when you die then their pension would be treated as Unsecured Pension NOT Alternatively Secured Pension and so may benefit from the much more flexible death benefits.
Disadvantages of Alternatively Secured Pension:
- All the same disadvantages as under Unsecured Pension.
- You must have your pension reviewed annually which will increase your administration costs.
- The investment return needed to offset mortality drags can mean that more risk may need to be taken at a time in your life when attitude to risk is usually very low.
- GAD rates stop at age 75 so although you are growing older, your annuity rates are not getting any better.
- You MUST draw a minimum pension of at least 55% of the GAD pension.
- Much stricter death benefit rules. Where survived by a spouse/financial dependant a pension benefit must be provided. Otherwise it must be paid to a nominated charity. It is possible to pass on to family members but there would be a large tax penalty incurred of 82%. Because of this PYSS will not allow this option.
- ASP comes into play at a time in your life where you may wish to simplify your finances rather than complicate matters. ASP is a complicated and confusing way of taking pension benefits so may not suit your attitude or circumstances.
To get the best from Income Drawdown you should seek the advice of an independent financial adviser
Kevin Stelfox has over 20 years financial services experience. Based in the UK, Retirement Solutions Limited are Independent Financial Advisers (IFA) – Call us on 0800 043 0725 Article Source:http://www.articlesbase.com/personal-finance-articles/income-drawdown-a-guide-1478405.html
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