Barclays Wealth

Pension income drawdown

Income drawdown is an alternative to buying an annuity. It allows your pension fund to remain invested whilst you draw an income from the fund. There are two ways you can draw an income and both provisions can be started, amended and rescinded in lieu of an annuity alternative at any time.

Pension Income Drawdown (Capped)

Capped Drawdown allows you to start your pension income drawdown from age 55. Tax rules allow you to withdraw anything from 0% to 100% (2011/12) of the relevant annuity you could have bought at outset. These limits are calculated by the Government Actuaries Department (GAD).

Up to age 75 your maximum rate is reviewed and recalculated at least every three years, based on the fund value and the GAD limits at the time. After this yearly reviews take place.

Income is taxed at your highest marginal rate of Income Tax.

Unsecured Pension (USP)

A USP allows you to start your pension income drawdown before you're 75*. Tax rules allow you to withdraw anything from 0% to 120% (2011/12) of the relevant annuity you could have bought at outset. These limits are calculated by the Government Actuaries Department (GAD).

Your maximum rate is reviewed and recalculated at least every five years, based on your age and the value of the unsecured fund at the review date.

The advantages of Capped Drawdown are:

• You retain ownership of your pension fund
• There is no requirement to draw any income
• The income you withdraw can be varied each year, up to the maximum amount, to suit your needs or control your tax liabilities
• You are required to take or waive the tax-free lump sum prior to commencing the provision
• You are not obliged to buy an annuity
• You can top up your drawdown and benefit from tax relief.

The potential disadvantages are:

• Investment charges continue as long as your pension fund is invested
• High income withdrawals may not be sustainable
• Taking withdrawals can erode the capital value of the fund, especially if investment returns are poor and a high level of income is being taken. This could result in a lower income if an annuity is eventually purchased
• Annuity rates may be at a worse level if annuity purchase takes place at a later date
• Your spouse or dependant will be liable for a tax charge on the amount remaining in your fund on your death.

Pension Income Drawdown (Flexible)

Flexible drawdown can be selected at anytime after the attainment of age 55 and gives you the ability to ignore the maximum income limits on drawdown funds provided you have met certain conditions.

The rules require you firstly to meet a Minimum Income Requirement (MIR). The MIR requires you to have a secure pension income of at least £20,000 per year. Sources of secure pension income may include state pensions, final salary pensions and pension annuities. (non pension income and income from Capped Drawdown do not qualify as MIR).

Income is taxed at your highest marginal rate of Income Tax

The advantages of Flexible Drawdown are:

• You retain ownership of your pension fund
• Once MIR is satisfied, you may draw as little or as much from the remaining fund as you wish, including encashing the whole fund. Any encashments are deemed income
• You are required to take or waive the tax-free lump sum prior to commencing the provision
• You are not obliged to buy an annuity.

The potential disadvantages are:

• Unlike annuities, income can vary from year to year and there is no guarantee that it will go up
• Potential risk that benefits could be lower than if an annuity had been bought
• Annuity rates may be at a worse level if annuity purchase takes place at a later date
• The maximum and minimum withdrawal limits are more stringent than with a USP
• Your spouse or dependant will be liable for a tax charge on the amount remaining in your fund on your death 
• Investment charges continue and can be higher under an ASP to meet the requirement for annual reviews
• High income withdrawals may not be sustainable
• Taking withdrawals can erode the capital value of the fund, especially if investment returns are poor and a high level of income is being taken. This could result in a lower income if an annuity is eventually purchased. Pension drawdown funds are no longer subject to inheritance tax so funds taken out if not spent will become part of your estate and potentially subject to inheritance tax.

Learn more about pension income drawdown

To learn more about how Barclays Wealth could help you, please contact us and we'll be in touch as soon as possible.

Tax treatment will depend on an individual's personal circumstances and may change in the future. Barclays Wealth does not provide tax advice. If in doubt we recommend you obtain your own independent tax and legal advice tailored to your individual circumstances.

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