The Government is to impose a minimum pension income requirement for those wishing to use income drawdown for access to their pension savings.
The changes will be part of modifications to the ‘age 75 rule’, which had required pension savers to purchase a pensions annuity by that age. Savers will now be free to leave their pension funds invested in the stock market, taking (or ‘drawing down’) an income that can vary each month. Income drawdown is, therefore, well-suited to those whose monthly need for pension income may vary, for instance if they continue in part-time work.
Details of specific figures for the drawdown limits have not yet been revealed.
ASPs, which provide a similar arrangement of income drawdown within set limits, will now be abolished, and ASP holders will be automatically switched into capped drawdown after April 2011.
Government emphasises that income drawdown within set limits is a way of giving pension savers greater flexibility. However, the annual cap is also designed to help ensure that their pensions income will last longer, and reduce their potential reliance on pension income from the state. The UK was recently highlighted as having one of the lowest and most meagre state pensions in the EU.
The flexible drawdown arrangement (different to the capped drawdown) will allow access to unlimited lump sums, subject to a minimum income requirement (MIR).
Advantages of pension income by income drawdown
The advantage of income drawdown is that you retain possession of your pension savings, rather than handing them over to an insurance company to purchase a pensions annuity.
Whereas funds transferred from an ASP to the holder’s dependents upon his death were previously subject to charges totalling 82% of the funds, the government now proposes that this be replaced with a new 55% ‘death charge’.
