Pension income options

An alternative to a secured pension is a drawdown pension, whi...

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...o types of drawdown, capped drawdown and flexi-access drawdown.

Capped drawdown is only available for those members who were in capped drawdown on 5 April 2015. Since that date, if a member wishes to designate additional funds into an existing capped drawdown arrangement they are still allowed to do so, and their maximum income for their entire capped drawdown plan is recalculated immediately. Care needs to be taken, however, that the member’s capped drawdown provider adds the additional monies to the member’s existing capped drawdown plan as opposed to creating a new flexi-access drawdown plan to receive the monies. The reason for this is that by adding the additional monies to the existing capped drawdown plan, the money purchase annual allowance will not be triggered, but by creating a new flexi-access drawdown plan to receive the additional monies it will.

Withdrawals are subject to a maximum income level but there is no mi...

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... drawdown upon transfer, but while removing the income limit this would also trigger the money purchase annual allowance.

In general, where a fund in capped drawdown pension is transferred, the income limits and the review period remain the same.

Where an individual is in capped drawdown and decides to convert it into flexi-access drawdown with their existing provider, the money purchase annual allowance would be triggered when they notify the scheme administrator of their intention to convert into flexi-access drawdown and subsequently take a drawdown pension from that fund in excess of their maximum permitted income. Once capped drawdown has been converted into flexi-access drawdown it cannot be converted back.

With what frequency must the maximum permitted income limit available under capped drawdown be reviewed?

Answer : Purchase course for answer

From 6 April 2015, all existing flexible drawdown plans automatically became flexi-access drawdown plans. The effect of this for those members being re-designated from flexible drawdown is to immediately give them a money purchase annual allowance which they would not previously have had as their annual allowance under flexible drawdown had been set to zero

The key advantages of flexi-access drawdown are that it allows the member to wi...

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...ly unnecessarily high income tax charges on lump sum withdrawals which could be reduced if a more carefully planned process of withdrawals was followed instead. There is also the added risk of fund depletion and the member outliving their pension fund.

When will the money purchase annual allowance (MPAA) be triggered when a member designates monies into flexi-access drawdown on or after 6 April 2015?

Answer : Purchase course for answer

A member can use part of their capped or flexi-access drawdown fund to buy a temporary annuity from an insurance company, known as a short-term annuity. The annuity must be payable at least once a year and it can be set up using either the conventional or flexible annuity rules. The only death benefit it can include is a guarantee period of no more than five years. ...

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...d from the capped drawdown fund. As such, the maximum short-term annuity income when added to any other income taken from the drawdown fund must not exceed that which could be received under capped drawdown. Any excess over this limit will be an unauthorised member payment.

What is the maximum term for a short-term annuity?

Answer : Purchase course for answer

If the holder (previous recipient) of a pension plan dies while in capped or flexi-access drawdown pension, the fund can be used in one of four ways:

It can be returned to the deceased's beneficiaries as a lump sum, subject to the lump sum being taxed as pension income under PAYE on the recipient if death occurs on or after the...

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....

There is also no tax charge on the charity receiving the payment, as long as it is used for charitable purposes.

The only death benefits payable under a short-term annuity are where a five-year guarantee period was built in to the annuity and as such the income payments will continue for the balance of the guarantee period.

Because drawdown pension funds remain actively invested this exposes the member to investment risk that generally does not exist with lifetime annuities or scheme ...

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...drawdown pension is known as ‘mortality drag’. Mortality drag increases with age and decreases when an allowance is made for a spouse's pension.

The main advantages of drawdown pensions are:

Immediate access to a pension commencement lump sum without the need to take full income

Flexible income which can be varied as needed to meet income needs or maximise tax advantages

An annuity can be bought at a time of the member’s choosing allowing the member to benefit from improvements in annuity rates

The fund remains invested giving the member control over the investments held and scope for real investment growth. This is particularly attractive to more sophisticated investors

Death benefits are usually higher and more flexible than under secured pension alternatives such as annuities.  Inter-generational pension/tax planning is  possible

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The main disadvantages associated with drawdown pensions which mean it has restricted suitability are:

As the fund remains invested the member carries the investment ri...

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...rges tend to be relatively high, given the need to administer the funds and the withdrawals. There is also an ongoing need for advice and any associated charge for this

Instead of designating part of the fund to drawdown, making a 100% withdrawal taxed as pension income under PAYE and taking the related tax-free lump sum, a member of a defined -contribution scheme can just take a UFPLS, leaving the rest of their pension arrangement untouched.

To qualify as an UFPLS, it must be payable from uncrystallised funds held in a defined-contribution arrangement, and the member must have reached normal minimum pension age (or earlier protected pension age) or be eligible for early retirement due to ill health.

Each UFPLS payment has a tax-free and a taxed element. There is however no pension commencement lump sum (PCLS) payable in relation to an ...

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...pension credits, and if the available portion of their lump sum allowance is less than 25% of the amount of the payment they are seeking to withdraw.

Flexibility through UFPLS is available legislatively, but schemes or providers do not have to offer it. They can do so if they wish, as there is a permissive statutory override to their scheme rules if they want to allow it. Clients who cannot access it through their current provider may be able to transfer to take advantage of UFPLS. It has, however, been suggested that the UFPLS option will allow some defined contribution scheme providers to offer increased flexibility, without the need to provide full flexi-access drawdown.