Prime Time Financial

The shape of Drawdown Pensions has changed enormously as from 6th April 2011. With Drawdown Pensions (previously known as "Unsecured Pensions") you can choose to take a tax-free cash lump sum, and then there are two types of pension income:

Capped Drawdown Pension

The pension fund remains invested and an annual income can be taken, if required. You can choose the income up to a limit set at the outset by the Government Actuary's Department (GAD). This limit is reviewed every 3 years until you are 75, and then annually after that. This limit is rougly equal to 100% of a single life annuity that you could have purchased instead, but it does give you the option of taking less than the maximum if, for example, you are still working part time or have other income.

If you die whilst taking a Capped Drawdown Pension, the beneficiary you nominated has a number of different options available to them:

• Take the fund as a cash lump sum (with a tax charge of 55%)
• Buy a lifetime annuity
• Buy a scheme pension
• Continue taking Drawdown Pension

Flexible Drawdown Pension

There is no maximum limit with this type of plan allowing immediate access to the remaining funds. But you must be able to prove that you have a secured pension income already of at least £20,000 pa from other pension arrangements - the "Minimum Income Requirement". You also cannot have made any pension contributions in the same tax year in which Flexible Drawdown starts, nor be an active member of a Defined Benefit pension scheme.

Funds taken would be subject to the usual income tax rates. This option will not be available for Protected Rights benefits until 6th April 2012.

There are no death benefits under Flexible Drawdown Pension if all the plan benefits are taken at outset.

Inheritance Tax Issues

The Government has confirmed that IHT will not typically apply to death benefits from pension schemes. This is an improvement on the old Drawdown regime - above age 75 an "Alternatively Secured Pension" could have been subject to 82% tax on death!

Suitability

Drawdown Pensions are generally suited to the relatively sophisticated investor, who is capable of fully understanding the risks involved. The contract can be used as a useful tax planning tool and a means of accessing pension fund tax free cash without having to take the full taxable income.

Flexible Drawdown is still relatively new, and not all pension providers can yet offer products to support it.

Given the range of options available and the importance of taking the right decision, we would certainly recommend taking advice on the best thing to do.

Last reviewed 26th April 2011