Brett Investment Newsletter - March 2011Drawdown (USP) Forever
If you read the personal finance sections of the weekend press, you will probably have seen comments about abolishing the need to buy an annuity with pension funds post age 75 plus other drawdown (Unsecured Pension) rule changes.
These will become effective from April 2011.
Who should read this?
This briefing note will be of particular interest to people who are close to or already drawing down from their pension.
The headlines
In brief here are the following changes due to come into force from April 2011:
# So for anyone wishing to maximise the amount they can draw from their pension over the next 5 years a small window of opportunity remains. To benefit you must make a request prior to 5th April 2011 to commence drawdown and this will allow you to benefit from the 20% GAD uplift until 2016.
Should you wish to explore this option please contact me URGENTLY and we can make the arrangements for you.
In summary what will my options be at retirement?
From age 55 you can take a tax-free cash lump sum (usually 25%) from your pension fund and either buy an annuity or draw down an “unsecured pension” from the fund.
We are finding that an increasing number of clients are opting for the drawdown (USP) option.
What’s wrong with an annuity?
Not a lot. Annuities are a cost-effective way of buying guaranteed life-time income. They will remain the most suitable source of retirement income for most people.
An annuity is insurance against living too long. You hand over a premium (your pension fund) and the insurance company guarantees to pay you an income for the rest of your life – however long or short that is.
Objections to annuity purchase are often emotional, although this makes them no less valid. For example, most of our clients will be on the “winning” side of the annuity gamble and live longer than average; but we understand why they may not want to take the risk. So we understand why having an alternative to an annuity is important.
Drawdown forever
From April 2011, the same options will be available at whatever age you take your pension benefits after your 55th birthday:
• Annuity
Buying an annuity will continue to be appropriate for many retirees, especially for those with smaller pots as money-back guarantees will be allowed on death after age 75.
• Capped drawdown
This option will be a more restricted version of Unsecured Pension. The maximum income limit will be reduced from 120% to 100% of an equivalent annuity (known as the GAD rate). The minimum limit will stay as £Nil.
• Flexible drawdown
This option will allow individuals to draw down unrestricted amounts from their pension pot, provided that they can demonstrate that they have secured a sufficient minimum income to prevent them from exhausting their savings prematurely and falling back on the state. This is currently set at £20,000 p.a. Income that will count towards this include:
The 25% tax-free cash option will remain available, even after age 75. All benefits drawn down will continue to be taxed as income.
An example provided by HM Treasury is of a 65 year old man with £5,078 basic state pension and £2,500 additional state pension, but no other pension income. A healthy 65 year old would need a pension fund of roughly £233,000 to buy the £12,500 a year annuity income to meet the MIR. Any extra pension fund can be put into flexible drawdown and taken as taxed income without restriction. Alternatively this person can stick to the more restrictive capped drawdown.
Welcome reforms
Overall these planned changes are welcome. They should give savers more confidence that money saved in a pension is not wasted. However, drawdown should only be entered into after seeking specialist advice.
Of course if you have any queries please email me on jb@bretinvestment.com or call me on 01896 822520.
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