What are the pension drawdown rules?

The new pension rules are now a reality, and retirees have more options with their pension funds than ever before. One product that is likely to become popular is  pension drawdown , but there may be some confusion around the pension drawdown rules.

Were annuities compulsory before April 2015?

At the time George Osborne announced the revolutionary pension changes in his 2014 Budget, annuities were largely considered the default retirement product. As our managing director Jamie Smith-Thompson explained to Retirement Planner earlier in the year, although it’s technically true that annuities have not been compulsory since 2006, “…it is not accurate to suggest that the new rule is the same as the old rule. In December 2010, the government itself acknowledged that, thanks to tax charges of up to 82% for alternatively secured pensions, ‘in practice, annuitisation by age 75 is effectively compulsory for almost all pension savers’.”

These tax charges no longer apply, so no one will feel compelled to buy an annuity as a result of government policy.

So what is drawdown?

Simply put, with drawdown your pension remains invested and you take an income directly from it. The hope is that the fund will continue to grow, but the income is not guaranteed, so there is not the same security as with an annuity. However, there is more flexibility with income drawdown than annuities as the amount of income you take can vary, and the pension fund can be passed to beneficiaries rather than staying with the insurance provider as is usually the case with annuities.

Types of drawdown

Prior to the new pension rules taking effect, capped drawdown was the main drawdown product. This capped the amount of money that could be removed each year as a safeguard against depleting the fund too quickly, and the annual allowance was £40,000.

Following the changes, all new drawdown plans are flexi-access drawdown, although anyone already in a capped drawdown plan can continue unaffected. For flexi-access plans, the main pension drawdown rules are:

  • You cannot access your pension fund before the age of 55
  • 25% of the fund can be removed as tax-free cash, the remaining 75% is treated as taxable income
  • The annual allowance drops to £10,000 once taxable money has been removed
  • There are no limits on how much money can be taken each year
  • There is no minimum income or fund size required to enter income drawdown (but it may not be very suitable for small funds)
  • The fund can be passed to beneficiaries on death

What tax will I pay?

Other than the 25% tax-free allowance, money removed from a pension is treated as income and tax is charged at your marginal rate. For example, if you pay 20% tax on your salary then you will probably pay 20% on your pension withdrawals, unless you take enough to push you into the higher-rate tax bracket, in which case you will pay 40% on a portion of the earnings. On the other hand, if you have no other earnings and your withdrawals do not exceed your personal allowance, you should not pay any income tax.

The tax implications may act as a safeguard against depleting a fund too quickly, especially as it is now possible to strip a pension fund entirely. This can trigger a large tax bill, and we have already warned that you could buy the taxman a Porsche under the new pension rules.

Ultimately, flexi-access drawdown offers a lot of flexibility when taking an income from your pension, but it’s important to be aware of the tax implications especially on larger withdrawals.

Are you considering flexi-access drawdown for your retirement income? Let us know with a comment below.

Call 0800 304 7288 for a friendly chat about your pension

The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section: https://www.portafina.co.uk/whats-new

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