Income Drawdown/Unsecured Pension(USP) and Phased Retirement

Q  When are these options suitable?

A  When.....

a) You would like to leave your ‘unused’ retirement fund to a beneficiary in the event of your death.

b) You think that annuity rates will improve in the future

c) You have a spouse much younger than you are and are concerned about the cost of buying a spouse's pension (the younger the spouse, the greater the cost of the pension and therefore the greater the reduction in the main pension).

d) You wish to vary the amount of pension income each year.

e) You are not averse to risk and believe you can make investment returns work for you to increase your pension.

f) You have other capital/ source of income and can afford to take a higher risk.

g) You have a lower life expectancy for you or your spouse.

Q  What is Pension Income Drawdown?

A  Also known as Unsecured Pension (USP). At retirement instead of buying an annuity you leave your fund invested and take withdrawals from it. At age 75 you must however either buy an annuity or move into Alternative Secured Pension(ASP)(See further on).

 

Q  How much can I draw from my fund?

A  The maximum pension income is broadly equivalent to 120% of the amount available from an annuity. There is no minimum so you can choose not to take any income at all. The maximum is set and reviewed by the government actuary every 5 years. GAD Rates

 

Q  What happens to my fund?

A  It is invested in the investment funds of your/your adviser’s choice.

 

Q  Can I still take a tax free cash sum?

A  Yes you can but this must be done before drawdown starts.

 

Q  Are there any risks?

A  Yes. Your fund is subject to investment performance and therefore it can fall in value as well as rise. A fall could result in a lower income.

 

Q  What happens if I die while taking Income Drawdown?

A

a)  If under 60 your spouse can defer taking an income until age 60 when an annuity has to be bought.

b)  You spouse can continue taking USP drawdown until aged 75.

c)  Your spouse may buy an annuity subject to it not exceeding the maximum pension which would have been payable to you.

d)  He/she can take the remaining fund as a lump sum less tax at 35%. This tax liability also applies to a non spouse beneficiary.

 

Q  Do I pay tax on my Drawdown Income?

A  Yes in exactly the same way as an annuity would be taxed - as earned income.

 

Q  What is Phased Retirement?

A  It is a pension fund divided into many portions or segments.

 

Q  How does it work?

A  Each year, sufficient segments are encashed to provide a tax free cash sum and pension.Together these two components are used to satisfy the income requirement.

As years progress smaller tax free cash sums are needed as the annuities cashed each year accumulate to provide a larger annuity income.

 

Q  What happens if I die in Phased Retirement?

A  Your dependents receive a combination of the remaining tax free cash and any dependents annuities for which you have made provision.

 

Q  Can Income Drawdown and Phased Retirement be used together?

A  Yes very much so, and a combination can often be more suitable than either of the two methods alone.

 

Q What happens at age 75?

A You must either take an annuity or move into a different type of Drawdown known as Alternatively Secured Pension (ASP). The minimum amount that has to be taken is 65% of the basis amount which is the highest level single life annuity available on the open market for a 75 yr old (regardless of the actual age of the individual)and this is reviewed every year.  The maximum is 90%. The basis amount is worked out using the FSA annuity comparative tables. 

 

Q What happens if I die in ASP?

A Dependants pensions must be provided. If there are no dependants then funds can be reallocated to other scheme members or as a lump sum death benefit and if the latter, it will be subject to Inheritance Tax.

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