Will you be "drawing down" your pension soon ?

Yet again, we are experiencing changing pension legislation and whilst, much of it is for the better, some changes may adversely affect you. In particular, it is our view that the changes coming in, in April could disadvantage you, if:

• You are likely to want access to some or all of your pension fund within the next five years, and
• When you do so you do not buy an annuity, and
• You have need to draw upon the maximum income available or close it

Let me summarise some of the key points that relate to income drawdown and the changes that are taking place.

GAD Rates are those used to determine how much income you can purchase with your pension fund. As an example the rate for a 60 year old male is presently around £60 per £1000 of fund and for a 60 year old female is around £63 per £1000 of fund.

Not only is the maximum income amount of 120% of GAD falling after April, but GAD rates are set to fall also.

Crystallising all or part of your pension fund now triggers a “lock” into the 120% maximum amount, even if you do not need the maximum income now – it is giving you an option to do so in the next 5 years.

Crystallisation means drawing upon all or part of your pension fund. This could be to access the tax free lump sum and draw an income or just the tax free lump sum.

The dilemma is what to do with the funds you draw, be it tax free cash sum or income, at a time when they may not be needed from the plan.

Possible solutions could be to re-invest the tax free lump into ISA’s, both before the end of this tax year and immediately at the start of the next one, and recycle the income back into your pension account. Both will be tax neutral.

The main drawback as we see it, with this strategy is the higher tax charge in the event of death if the lump sum death benefit is taken.