How clients can make the most of flexible drawdown

Martin Tilley of Dentons Pensions Management looks at whether clients meeting the minimum income requirement should automatically apply for flexible drawdown.

My career in pensions started in 1982 when governance was provided principally by the Finance Act 1970.

Although I expected times would change and so would legislation, one of the key messages I understood from my early years was this:“Tax incentives are granted on the understanding that resultant benefits from a retirement savings contract are payable for the life of the individual.”

It is nearly a year now since this message was shattered by the announcement of flexible drawdown, a means of apparently withdrawing pension capital at times and at rates to suit the individual without limit.

As with all legislation, some chopping and changing occurred before the Finance Act received Royal Assent in July 2011 and advisers have now had a chance to muse this new weapon for their higher net worth clients.

But aside from understanding flexible drawdown, it is the interaction with other changes also introduced by FA2011 that provides the greatest opportunities for income and inheritance tax planning.

Flexible drawdown, can be utilised by any individual who meets the minimum income requirement (MIR). What counts towards the MIR is limited to income derived from secure retirement sources.

These are principally:

• A member’s basic and additional state pension

• Compulsory purchase lifetime annuity (level or indexed but not investment backed unless guaranteed minimums apply).

• Scheme Pension (derived from a scheme with 20 or more members).

At first glance it would seem that only the very wealthy could utilise this new found freedom and indeed data published by the Pensions Policy Institute suggested only around 200,000 people could meet the MIR in 2010.

However the flexibility that flexible drawdown offers should not be ignored. A recently signed new client, who had deferred his state pension benefits to age 71, has started to receive in excess of £17,000 p.a. from the State, which in addition to a small old defined benefit scheme opens up new avenues to him.

Flexible drawdown may also be appropriate for those who are in unsecured pensions and awaiting their next formal review. This would bring them into the realms of capped drawdown, with its revised GAD table and withdrawal of 20% uplift.