Drawdown query

Smichri

Can someone kindly answer these points for me.

1. If I choose to convert my pension to capped drawdown, I assume that there is no option to secure a minimum payment period, say 10years, as is available for annuities?

2. I understand that on death, any funds remaining are subject to a tax of 55%. Does this still apply if the funds are transferred to the surviving spouse and used to purchase a pension for them?

Thank you

SippTechie

Smichri wrote: »

Can someone kindly answer these points for me.

1. If I choose to convert my pension to capped drawdown, I assume that there is no option to secure a minimum payment period, say 10years, as is available for annuities?

2. I understand that on death, any funds remaining are subject to a tax of 55%. Does this still apply if the funds are transferred to the surviving spouse and used to purchase a pension for them?

Thank you

1. Once your pension is in capped drawdown you'll be told what your maximum pension is. You can then choose to take a pension of anywhere between £0 and the maximum pension each year. The maximum pension stays at that level for three years (only one year once you've hit 75) and is then subject to review.

At the point your maximum pension is due to be reviewed, if your fund has fallen in value because of any combination of poor investment performance, too much pension being taken, the charges being high, the Government changing the rules on how the maximum is calculated (this is under review at the moment, or gilt yields being lower than they were when you went into drawdown (they've gone up a little over the last year) then your maximum pension may fall.

2. If your spouse chooses to take the death benefits as a dependant's pension then it won't be subject to a 55% tax penalty at that point in time. Your spouse will have to pay tax on the pension they receive at their marginal rate of tax. When they die, unless there are any surviving dependants (of you, not your wife), then the remaining fund must be paid as a lump sum which, under the current rules, will be subject to tax at 55%.

bmm78

Smichri wrote: »

1. If I choose to convert my pension to capped drawdown, I assume that there is no option to secure a minimum payment period, say 10years, as is available for annuities?

There are products known as "Fixed Term Annuities" which provide a fixed income for a specified period (eg 5 or 10 years), and a guaranteed sum at the end of it that can be put towards another retirement product.

The name is a bit of a misnomer, as the products are written under drawdown rules, and one of the main implications of this is that income is still subject to GAD reviews and therefore could potentially reduce (depending on where you set the income at outset).

They are very much a niche product, and are one of an increasing number of options in between conventional annuity and drawdown. They remove the investment risk and uncertainty regarding fund performance, but at the same time sacrifice much of the flexibility and potential for growth.

A Financial Adviser who specialises in at-retirement should be able to talk you through this if you want to explore it in more detail. Most non-advised brokers don't offer them. Care has to be taken with these products though, as halfway-house options can sometimes be the worst of both worlds instead of the best.

mania112

As far as I remember a Fixed Term Annuity is still limited to GAD. So if GAD max is less than chosen income after 3 years, it will go down.

The only thing I know of that combats that is Met Life's Guaranteed Income plan, which add's 'ghost' units to the plan if the fund value is in deficit to the max income it can provide.

It's too OTT in my opinion, and quite expensive.

If you want that level of cover, I think you ought to be in an Annuity.

bmm78

mania112 wrote: »

As far as I remember a Fixed Term Annuity is still limited to GAD. So if GAD max is less than chosen income after 3 years, it will go down.

Yeah, it's always a big risk when taking max GAD. The "lost" income is added to the guaranteed sum at the end of it, although that isn't that much consolation for people when their income goes down.

Think I may have misunderstood the OP's question with the previous post. A 10 year guarantee period isn't applicable to drawdown, as income is taken directly from the fund. Whatever is left in the pot on death can be used to provide benefits.

Smichri

Thank you for all your replies.

We are taking early retirement and at 56, trying to work out the best way to pay for it. We both have a defined contribution scheme,( as well as other pension provisions) and both have approx £200000 invested. We intend to take maximum lump sum available. However we need to take the income from either one or possibly both to top up our BTL income.
Once we reach 65, our other pensions kick in and we will be comfortably well off. The concern is how we would manage financially if one of us died before 65, but if the balance of a drawdown fund can then be transferred to the surviving spouse without being taxed, then income can be maintained?

Linton

Smichri wrote: »

Thank you for all your replies.

We are taking early retirement and at 56, trying to work out the best way to pay for it. We both have a defined contribution scheme,( as well as other pension provisions) and both have approx £200000 invested. We intend to take maximum lump sum available. However we need to take the income from either one or possibly both to top up our BTL income.
Once we reach 65, our other pensions kick in and we will be comfortably well off. The concern is how we would manage financially if one of us died before 65, but if the balance of a drawdown fund can then be transferred to the surviving spouse without being taxed, then income can be maintained?

Yes, that is one great advantage of drawdown - a surviving spouses pension is built in to the scheme.