Flexible Drawdown

What is Flexible Drawdown?

The compulsion to secure an income from your pension funds by age 75 is to be removed on 6th April 2011.

In addition a pension holder will have the right to draw down the whole of their pension fund as a lump sum under a new option called 'flexible drawdown'
Flexible Drawdown is generating a lot of interest as it allows savers to drawdown their entire pension pot as a cash lump sum provided they can prove a lifetime retirement income of £20,000 or more.

What is MIR?

The £20,000 income band is being referred to as Minimum Income Requirement (MIR). Minimum income requirement is £20,000 each person with no allowance for couples. Minimum income requirement includes income from state pension which means that a fund of around £230,000 at todays rates will be required to meet MIR.

Inheritance Tax

Another major change on 6th April 2011 is the scrapping of inheritance tax on pension benefits over age 75.

Flexible Drawdown and Tax

A person using the flexible drawdown option needs to consider the tax implications of using flexible drawdown in three main areas.

Firstly, the taxation implications of drawing down the pension pot under flexible drawdown, likely to be at least 40% in most cases.

Secondly, where will the cash be held after flexible drawdown and the tax efficiency of any alternate investment vehicles.

Thirdly inheritance tax implications - once money is out of the pension it becomes part of the estate.

The best inheritance tax option may be to leave the funds inside the pension despite the 55% tax charge on income withdrawal on pension funds for over 75's. Income tax on withdrawal, tax on capital roll up, and inheritance tax can easily total up to over 55%. Therefore, leaving the funds in the pension pot and in the control of the pension holder may be attractive. If circumstances change, and residential care becomes an issue, these funds could be invaluable to the pension holder.