If you have pension income of over £20,000 per year (Minimum Income Requirement) you are now allowed to take unlimited amounts of income from their pension funds, subject to tax at your marginal rate.
It is only available if you aged 55 or more and are able to meet the minimum income requirement (MIR).
The MIR is currently set at £20,000 per annum and the government has agreed this is the minimum guaranteed amount of income required by the individual.
What counts towards the Minimum Income Guarantee
- State Pension Benefits – Basic and Additional
- Final Salary Pensions
- Pension Annuities
- Scheme Pensions
Purchased life annuities are not allowable.
In reality we would not expect anyone to fully withdraw their whole pension fund as tax could be at 50% on some of the fund withdrawal. What most investors are likely to do is withdraw funds each year as when they need it, leaving the remainder of the fund invested.
Additionally, once an investor enters into Flexible Drawdown they will no longer be permitted to invest money into the pension plan and receive tax relief. So it’s important to make sure that contributions into the pension scheme are maximised before entering into a Flexible Drawdown arrangement.
Higher rate tax payers may be attracted to this type of income withdrawal if they think that they will become basic rate tax payers in the future. Investors are able to withdraw surplus funds up to the higher rate tax bracket per annum. Having paid into their pension as a higher rate tax payer whilst employed they can then withdraw income as a basic rate tax payer once they retire.
Eligility for Flexible Drawdown
The investor must meet the following criteria to be eligible for flexible drawdown:
- Income of £20,000 (Minimum Income Requirement)
- No longer contributing to a defined contribution scheme (i.e. Personal Pension).
- Not build up further benefits in a defined benefit arrangement (i.e. Final salary Scheme)
- Must be 55 years of age or over.
- Provide a satisfactory declaration to the pension provider concerned that they meet the above conditions.
Investors who opt for flexible drawdown can also able to take 25% of the drawdown as a tax-free amount. In the event of death, your surviving spouse/dependants would have four options:
- Take the fund on death as a cash lump sum less a one-off 55% tax charge
- Use the fund remaining on death to purchase a lifetime annuity
- Continue in Income Drawdown, with the maximum income allowance based on their age and sex
No Inheritance Tax (IHT) will typically apply to lump sum death benefits either before or after age 75. Where there is no dependent it will be possible to pay the lump sum death benefit tax free to charity.
