Liberty SIPP

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Drawdown

In the Governments most recent ploy to make pensions more appealing, accessible and easy to understand they have removed the ‘age 75 rule’ where clients must take out an annuity or ASP when they reached age 75. They have also given clients the option of a new type of drawdown known as flexible drawdown, as long as they can meet certain minimum income requirements. Finally they are decreasing or increasing, depending on your age and type of pension you were taking/likely to take, the tax on lump sum death benefits to 55%.
In the past and up until 6th April 2011 when you reached age 55 you could take a 25% tax free lump sum and also start income drawdown known as USP (Unsecured Pension). When you reached age 75 you would have to either buy an annuity with your remaining pension fund or take ASP (Alternatively Secured Pension). The Government Actuary’s Department (GAD) provided limits of how much income you could take from both USP and ASP. In USP you could take 120% of the GAD rate and in ASP you could take 90% of GAD. If you were to die before reaching age 75 your remaining pot would be taxed at 35% with the tax charge after 75 reaching 82%.

So what happens under this new legislation?

When you reach 55 you will still be able to take your 25% tax free lump sum and take an income, however USP will be replaced by Drawdown Pension (DP). Then on your 75th Birthday you will just simply carry on with DP if you have already started taking an income, and if you are yet to start there are now no obligations to do so. Therefore ASP will also be replaced by DP where you will be able to take a maximum 100% of the new GAD rates. They will be publishing updated GAD tables to cope with the fact that they will have to take into account mortality rates etc. In light of these new changes to USP and ASP, GAD maximum reviews will take place every 3 years instead of 5 up until age 75 and annually thereafter.

Drawdown Pension (DP)

There will be two types of DP, capped drawdown and flexible drawdown. Capped drawdown will be almost identical to USP however you will only be able to take 100% of the new GAD rates. Once you start capped drawdown you can continue to take it until you die under the new legislation, whereas before you would have been forced into buying an annuity.
Flexible drawdown allows individuals, who can meet certain income requirements, to accelerated and unlimited withdrawals of their pension fund. This requirement is known as the minimum income requirement (MIR) and will be set at £20,000 (to be reviewed at least every 5 years). The MIR only includes scheme pensions, state pensions, annuities and occupational pension schemes that are guaranteed for life.

For example:

Therefore this client would be able to take advantage of flexible drawdown, if they wished to do so, as their secured yearly income will be over £20,000. Being in flexible drawdown allows the client to withdraw as much of the remaining pension pot as they wish, however they will be subject to income tax at their marginal rate.

Lump Sum Death Benefits

• If you are under 75 then any uncrystallised are not subject to the recovery charge
• Every other scenario will incur 55% tax
• You can pay tax free lump sum benefits to a member nominated charity, however only in the absence of any living dependants

Mar 30, 2011