This post deals with a few of the key points concerning drawdown contracts. A more complete analysis of drawdown vs. annuities can be found in the Honister booklet available at this link.
A recent change in the rules has allowed people to enjoy a new option: “flexible drawdown” which allows pensioners to have complete flexibility over the sums they withdraw from their drawdown contract (subject to normal income tax), provided that they can pass a new minimum income requirement (“MIR”) of £20,000 per annum from other means. So, provided that you can prove to the Revenue that you have at least £20,000 of secure annual income p.a. in retirement from alternative sources, such as a final salary pension scheme or other annuities, you may withdraw as much as you wish from your flexible drawdown plan.
The flexible drawdown MIR is a one-off test, and once it has been satisfied you do not have to prove your income again in later years.
This contrasts, however, with another amendment in regulations which serves to reduce the maximum annual sums others may withdraw from their contracts, (i.e. those who cannot meet the new MIR statement of income from other means and so are presumably more dependent on their drawdown plans). They could previously withdraw up to 120% of the government actuarial department (GAD) prescribed limit, but this has now been reduced to 100% (in simple terms, the GAD limit is close to the £ amount that one might receive from a level single life annuity). This reduced GAD limit will apply from the next review of an existing drawdown plan.
One of the things that people forget about drawdown plans is that they may be converted into an annuity at any time. So if nothing else, they can be used to defer annuity purchase, especially for younger pensioners. But perhaps their greatest advantage over annuities is that after the death of the policyholder, a surviving spouse or dependent relative may simply take over the plan and continue to run it, without any special tax charge relating to the takeover. Thus the spouse / dependent relative (who will still be subject to income tax on the income), enjoys the benefit of the plan and may themselves convert it into an annuity for themselves in the future.
This is only a snapshot covering a few key issues. Give me a call on 0845 013 6525 and I’ll be happy to discuss drawdown and annuities in the context of your own retirement planning objectives.