Once my client has invested in an Income Drawdown Product......

Question: Once my client has invested in an Income Drawdown Product, what are the implications from starting taking income straight away?

Answers:

Fiona Tait - Scottish Life

Once a client has crystallised (cashed in) their pension fund they may withdraw income immediately if they wish. Alternatively they choose to take PCLS only and then delay income until a future date. This is a very useful facility for those who might want to access a lump sum but who still have earnings.

The amount of income that may be withdrawn is limited to 120% of the clients GAD annuity rate when applied to the crystallised fund value. This is turn is based on their age and sex and current interest rates. The amount of income taken is flexible and may be changed at any time subject to this limit. Clients who have only partially retired, and still have some earned income, may choose to take a lower income during this period and then increase it when they need more income.

As the tax treatment of a crystallised pension fund is less advantageous than an uncrystallised one some clients withdraw their maximum income from the outset and then use it to make new contributions into the pension plan. This is particularly advantageous where the pension plan can hold both crystallised and uncrystallised monies. Clients who do not require the full value of their tax-free lump sum will usually leave part of their fund uncrystallised when they first access their benefits and may make contributions to this part of the plan.

Vince Smith-Hughes - The Prudential

One of the first points to be clarified is if the client requires their full pension commencement lump sum (PCLS). If they don't it may well be more tax efficient for the PCLS to be drawn in stages, as part of the client's income. This also has advantages from a death benefit perspective as any funds crystallised are subject to a 35% tax charge upon death.
Though income drawdown products are designed to pay income care needs to be exercised over the timings of the payments. This is because otherwise the fund can suffer from the effects of 'negative pound cost averaging'.

Several solutions to this are:

1) For an amount to be held in cash which will be used to pay out the first income payments. How much should be held will depend on individual client circumstances
2) For the adviser to recommend when withdrawals should be made
3) For a fund to be used such as with-profits where income payments aren't affected by short term market movements.

Stewart Dick - Hornbuckle Mitchell

"Once in a plan that allows income drawdown a client has a great deal of flexibility over how they take income from the plan. In addition to their Pension Commencement Lump Sum (PCLS), usually 25% of the fund available tax free, pension payments can be drawn from the plan via Unsecured Pension (USP). These payments are taxed as income.

The level of income drawn can be varied between 0% and 120% of GAD - GAD being the average single life level annuity rate as determined by the Government Actuary's Department. The applicable rate for the client will depend on their sex and age. This range means that the member can vary their income to suit their circumstances as required. This flexibility is increased by the fact that it is not necessary to use all of a member's fund to provide PCLS and/or USP at the same time - it is possible to go into 'partial drawdown' - essentially splitting the pension pot into chunks and crystallising the chunks as required.

As soon as a fund, or part of a fund, has been crystallised and benefits drawn (PCLS only or PCLS and income) then that fund (or part of fund) is now taxable on the death of the member. Any funds that are uncrystallised are usually available tax free to the beneficiaries, but as soon as funds are crystallised a 35% tax charge will apply to any lump sum payment on death. It's therefore very important for advisers and clients to make sure they understand the tax position and balance the need for cash or income against later tax implications.

Another important factor when considering drawdown is the impending change to age limits. It is currently possible for individuals to access their pension savings from age 50. However, this is being changed to age 55 from April 2010. Therefore anybody in the 49 - 54 age bracket should consider their need to access their pension savings - otherwise they may have a longer wait than they anticipated before they can draw benefits.

The income levels available and the tax position on death change dramatically when an individual reaches 75, at which point the fund must be used to provide an income, and PCLS must have been taken.