for Green Financial pension drawdown clients

Changes to Income Drawdown / Income Withdrawal type pension arrangements

Please note this post is intended to be an introduction for my existing clients. It is intended to be a brief guide and summary, not an all encompassing technical piece nor should it be taken as specific personal financial advice in any way!

April 6th 2011, the next tax year, heralds new income limits on drawdown plans.

The legislative changes are complex in part and with many of the new proposals (such as so-called ‘flexible drawdown’) many pension providers are unlikely to finalise their products to match the new legislation until well into the new tax year.

One of the major changes will be income limits – The most headline worthy change is that “maximum income on capped drawdown plans will decrease from 120% to 100% of GAD income”
Putting aside for one moment the awful acronyms and jargon that simply means maximum income for most people will fall by around 16%

However, some clients may benefit from preserving the old (higher) limits on their plan for as long as possible. This is likely to mean 5 years – that being the maximum ‘deferral time’ before the new limits MUST apply.
Depending on your type of plan, provider, anniversary date of plan & your age you may be able to ‘lock-in’ to these higher rates before April.
Remember the income is taxable, so don’t just take it because it is higher for a while – especially if you don’t need it or it pushes you into a higher tax bracket. Don’t be fooled by a ‘buy now while stocks last’ if this doesn’t apply to you. To really mix an old phrase up – ‘Don’t let the change in legislation tail wag the financial planning dog’!

There may be limits on what you can you with your plan and IF you want higher income and IF you want to do this pre-April it MAY be necessary to move your plan to another provider which MAY in itself have a cost. But even this could mean being drawn under the new limits sooner than leaving it where it is – this really is a complex scenario for most people in drawdown.
Even asking for an additional review (if you have already had one in your current pension year) may trigger an admin charge.

So in summary, a lot to think about and many variables all with some fairly lengthy and complex legislation behind it – and with a few future unkowns still lurking about.
If you are happy with your income (it may even be zero at the moment), don't need any more and don't want to draw out as much as possible as soon as possible you may not want to do anything.
But if you wish to discuss your own specific drawdown situation, please contact me.
www.iangreen.com has all the contact points – email, mobile, postal address etc



Action points reminder – with jargon included!
• Clients aged over 55 considering drawing benefits using income withdrawal, should consider crystallisation of benefits before the end of the tax year. This will lock clients into a five-year review based on current GAD limits rather than the rates and the three-year review periods that will apply on crystallisation from 6 April 2011.
• Recycle excess income as a contribution to improve tax efficiency of a client’s retirement funds. The maximum is £3,600 if a client has no relevant earnings, but could be greater where relevant earnings still apply.
• When gifting excess income for this tax year ensure clients take the relevant income withdrawals before the tax-year end. This probably means income withdrawals taken in March 2011.
• Review impact of potential additional designation. This may deliver higher maximum annual income on an existing income withdrawal fund for the rest of the existing five-year period, and will benefit from the potentially higher maximum income limits that will apply on additional designations before 6 April 2011.
• Ensure transfers of income withdrawal arrangements are completed by 5 April 2011 to preserve both the maximum annual income and the remainder of the client's current five year review period.


JARGON BUSTER!
GAD - Government Actuaries Department
GAD rates - maximum income from drawdown is calculated using GAD tables which take into account age and interest rates
crystallisation of benefits - in this context mostly means taking tax free cash and/or income withdrawals
flexible drawdown - a new type of drawdown coming in April 6 2011 with no limit but with restrictions on other areas
capped drawdown plans - the name for drawdown plans that are not 'flexible' (see above) - pretty much what plans are now and the type of plan facing the maximum income reduction
pension year - set at outset of policy and relevant to calculating quinquennial review dates. a pension year normally runs in line with the policy anniversary date
reference period - the time between reference dates, currently 5 years and moving (back to) 3 years after April 6 2011

E&OE