Income Drawdown Plan
Introduced in 1995, income withdrawal is a facility on personal pensions, which enables a personal pension holder to defer purchase of an annuity and, instead, take an income directly out of the pension fund. Previously, the rules dictated that in order to take an income from a personal pension, the accumulated fund had to be used to purchase a lifetime annuity. Income withdrawal can be used from age 50 right up until age 75, when an annuity must be purchased with the remaining fund. The benefit of income drawdown over annuity purchase is that the policyholder does not have to lock into annuity rates when they are low. Also, any dependant's benefits purchased through an annuity, such as a widow's pension, etc., result in a lower income to the annuitant, whereas, under income drawdown the policyholder's dependants can receive the value of the fund on death. Annuity income is either fixed or rises by a fixed amount, but under income drawdown, the income can, if necessary be varied by the Government Actuary's Department and is broadly equivalent to the maximum annuity which could have been purchased. The minimum income can be set to zero. These income limits are recalculated every 5th anniversary and can change substantially depending on a number of factors, such as:-
- Levels of income previously taken.
- Investment performance over proceeding 3 years.
- Product provider charges.
- Government Actuary Departments assumptions.
- Annuity rates at time of anniversary.
Further benefits are gained if the full tax free cash sum from the resulting retirement is not required all at once.
A Personal Pension Plan is normally divided into 1000 segments. By cashing in only those segments required, income can be generated partly from tax free cash and partly from the taxable income amount. This has 2 advantages:
- The taxation of income is reduced - in particular, this can be used to remain a basic rate taxpayer for those whose income in retirement would normally push them into the higher rate band.
- As less tax is being paid, then the gross income needed from the fund is obviously lower. This means that more remains invested resulting in greater growth and reducing the need to cash in too much at any one time.
