Interim rules from 27 March 2014

Unlike a conventional personal pension, which is used to build up a pension fund until a chosen retirement age is reached, income drawdown is used to pay an income once someone decides to retire or semi-retire. The remainder of their fund remains invested, rather than using it to buy an annuity.

 

There are currently two kinds of income withdrawal: capped drawdown and flexible drawdown. Subject to certain rules, in both cases, tax is paid on income at 20%, 40% or 45%, depending on the amount withdrawn and how much other income someone has. However, if any income withdrawal take doesn’t meet the rules, this will be taxed at 55%.

The rules and limits for income drawdown were relaxed from 27 March 2014, and there will be no restrictions under the new rules from 6 April 2015.

Capped drawdown

The amount that can now be taken as income is capped at 150% of the value of an equivalent annuity (up from 120%). There is no minimum level of income that must be taken.

Flexible drawdown rules

Under flexible drawdown, there are no limits on the income that can be drawn. However, someone must be able to show they are already receiving other pension income of at least £12,000 a year (down from £20,000). This minimum income level includes State Pension benefits, salary-related pensions, lifetime annuities and scheme pensions.

Effects on retirement income

Increasing the income drawdown amount may also affect how much Income Tax someone pays. So unless they require the extra income, they may want to limit the increase to keep within their current tax band. This will become especially relevant from 6 April 2015 when there will be no limit on how much someone can take out.

Income drawdown is higher risk. Savings are invested in the stock market, and their value can go down as well as up.

If too much income is drawn down in the early years, and the investments don’t perform well, someone could end up depleting their savings and running out of money.

New capped drawdown schemes will disappear from 6 April 2015 as greater freedom in taking income drawdown comes into play.