Pension contribition & flexible drawdown

ShedLiving

I have just heard that the government is proposing to change the rules for how much can be contributed to your pension pot if you are in flexible drawdown. reducing the sum from £40,000 to £10,000. Can anyone explain what flexible drawdown is (as opposed to income drawdown).


If wanted to take a cash lump sum from my pension but continue to contribute (still working) does that make it mean that I am in flexible drawdown?

Your_Hero

ShedLiving wrote: »

I have just heard that the government is proposing to change the rules for how much can be contributed to your pension pot if you are in flexible drawdown. reducing the sum from £40,000 to £10,000. Can anyone explain what flexible drawdown is (as opposed to income drawdown).


If wanted to take a cash lump sum from my pension but continue to contribute (still working) does that make it mean that I am in flexible drawdown?

This is capped drawdown and you will be limited to £10,000 annual allowance for DC schemes from next April (known as the Money Puchase Annual Allowance or MPAA for short).

The exception is when you enter capped drawdown now before april, then you can continue in capped drawdown indefinitely and no MPAA is triggered.

The MPAA applies to DC schemes only and it is expected that you can contribute the remainder of your annual allowance (£40,000 less any DC payments) into a DB scheme if you are part of one.

Flexible drawdown is the current "uncapped" version if you satisfy the minimum income requirements (£12,000 minimum pension income). This will be known as the so-called "Flexi-access drawdown" from April 2015.

jamesd

The government is not planning to reduce the amount that can be paid in by those in flexible drawdown, they are increasing it. The current limit for those in flexible drawdown is £0 and the plan is to increase that to £10,000.

jamesd

There are currently two types of drawdown:

1. Capped drawdown. The amount that can be taken out each year is limited by the GAD limit. Being in capped drawdown has no effect on future pension contributions and you can continue to make them under normal rules.

2. Flexible drawdown. The whole pot can be taken out as fast as desired. To enter flexible drawdown it is mandatory that a person has £12,000 (down from £20,000) in guaranteed income in payment at the time from sources such as the state pensions, annuities or workplace defined benefit pensions. When a person enters flexible drawdown no additional pension contributions are permitted for the rest of their life.

The proposed changes include:

A. Those in flexible drawdown will have their contribution limit raised form £0 to £10,000.

B. Those in capped drawdown will be able to continue to take out the current GAD limited level without triggering the reduction in contribution limit from £40,000 to £10,000. If they take out more, they will trigger the reduction.

In all cases it'll still be possible to take 25% out of a pension pot as a tax free lump sum if that hasn't been done already. This will not trigger the reduction to £10,000.

jamesd

If you will be 55 years old before 6 April 2015 and if you may want to take income and also pay in more than £10,000 a year I suggest that you start capped income drawdown as soon as you reach 55. This way you get to take out the GAD amount each year if you want to, while a person who waits until after that date can't take out more than the 25% without triggering the reduction to £10,000.

Once you have even one pension pot in capped drawdown this rule applies to all pots and all later contributions, so you get a lifetime ticket to be able to take out more than those who start after April 2015. Even putting £1000 into capped drawdown today is enough to let you later put a million into it and be able to take the GAD liit amount out of the million as well.

taktikback

Jamesd -there have been reports in the media of pension companies planning to levy charges for "early access" (55) to their pension products as a result of the pensions changes. Could be just scaremongering or a generalisation of situations where early redemptions would be appropriate (such as with profits..).

Is it safe to assume that people will generally be able to access their DC benefits without punitive charges?

jamesd

No contracts a year ago would have had a charge for this because it's new, so the firms will have to come up with some charging decision. Overall I expect it to reduce costs because instead of flexible drawdown only applying to some, now everyone will have the same capabilities, so it'll just have to be a normal part of systems. 55 isn't early access on any recent pension products because the normal age to get access to pension pots has been 50 or 55 for a long time now.

People on contracts run by old computer systems might find that those don't get updated because it's not cost-effective for the company. A transfer would be the way to go in those cases.

With profits would be one case where there could be significant costs, like market value reductions. Those that aren't unitised - individual units - but instead share a big pool might have issues with things like lost terminal bonuses if they don't let an old contract run to its normal term. Not an issue for anything remotely modern, though it'll affect some people.

One or more of the IFAs here would probably have a better idea than me of how things are developing in this area.

digannio

I think a lot in the pensions biz have regarded the announcement as a right royal pain the backside and it'll be left to a lot of people to switch their pots before they can take advantage of the new rules. I have an old Scottish Widows with profits where there is zilch chance of it being offered so that will have to be switched to access it under drawdown. I also have a DC scheme through Fidelity and that has no provision to do drawdown and that's only a few years old. It looks increasingly likely that will have to be switched to a SIPP to be able to do what the Chancellor has promised us all.

Unless, of course, there is some sort of edict from on high forcing providers to fall in line on policies. I suspect though that people will have to switch and some will face penalties to do that.

alegnah01

Hi I have a small pension of about £21K that will be eligible for payment from January next year when I am 60. I know I can take 25% tax free straight away but can I defer taking the rest until after the end of tax year (April 2015) as if I take it in 2014/15 tax year I will pay 40% tax on it and if I wait until after tax year end I will only pay 20% because my earnings with be significantly less next tax year

atush

It will depend on who your pension is with, and if they will allow it.

If they dont, you have 2 choices, transfer to one who will, or wait until after april 5th 2015.

alegnah01

Oh I see so instead of taking the 25% in January leave it and take it all after 05th April - that will save confusion wouldnt it . So I just do nothing when January arrive and start proceedings after 05th April