From 27 March 2014, changes to the budget means more people will be able to benefit from income drawdown instead of buying annuity.
Previously, individuals would have to purchase an annuity from an insurance provider using their pension savings to provide a guaranteed income for life. However, any annuity purchased cannot be changed and therefore, it is up to the individual to ensure they understand the different annuity options before choosing which one is right for them – a daunting prospect for some.
Income drawdown, otherwise known as an unsecured pension – allows individuals to keep their total fund invested whilst taking an income directly from it, meaning it will continue to benefit from any investment growth.
There are two types of income drawdown – ‘capped’ which means that there are limits on how much you can take out each year, and ‘flexible’ where you can take out as much as you like on the provision you meet certain criteria.
So what has changed?
Under the previous rules, each year individuals were allowed to withdraw up to 120% of an amount worked out by the Government Actuary’s Department (GAD).
This limit has now been raised to 150% for all pension years starting on or after 27 March 2014, so they may be able to choose to take more money from their pot each year, providing the rules of their scheme allow this.
How does this affect flexible drawdown?
In order to use flexible drawdown (which allows unlimited withdrawals) the previous rules stated that an individual needed to have a guaranteed income of £20,000 a year (before tax). From 27 March 2014, this has been reduced to £12,000.
Here at DPT Financial, we aim to make pensions accessible to everyone, so if there is anything you don’t understand, please contact us and we will be pleased to help.