Win, lose or drawdown

In this month’s Ask the Expert, Mike Morrison discusses the potential issues surrounding the new flexible drawdown regime

On 9 December 2010, the ­final details of the proposed new drawdown regime for April were ­announced. The capped ­drawdown regime was pretty much as we expected and a logical extension of the ­unsecured pension which we have come to know and love. More ­interesting is the idea of flexible ­drawdown, and I must admit I was surprised that the proposal is for it to commence this year.

A straightforward concept

The concept of flexible ­drawdown is straightforward: secure a ­prescribed minimum income level and you have the freedom to use the rest of the fund as you think fit, subject to the rate of income tax.

One of the major issues ­during the consultation period was the issue of the Minimum Income Requirement (MIR). Questions ­surrounding this included: at what level should it be set? What should be the allowable component parts? Should it escalate or be reviewed? Various figures up to £25,000 per annum were discussed, both with and without escalation.

In the end, the income level was ­confirmed at £20,000 per annum with no escalation, reviewable in five years. In the legislation, the MIR is met by an individual who has secured ‘relevant income’ more than the “minimum income ­threshold”, and that relevant income could come from any of the following:

• Scheme pension or dependant’s scheme pensions provided by a registered pension scheme
  
• Lifetime annuity or ­dependant’s annuity made by a registered ­pension scheme
  
• Payments under an overseas scheme which, if treated as a relevant non-UK scheme, would fall within the first two categories
  
• Payments of social security benefits. This means payments as defined in section 57 of the Income Tax (Earnings and Pensions) Act 2003 (state pension, graduated retirement benefit, industrial death benefit, widowed mother’s allowance, widowed parent’s allowance, and widow’s pension) or such substantially similar payment from a country or territory outside the UK.
  

Income from drawdown ­pension ­arrangements is specifically ­excluded, as are purchased life ­annuities. From the list above, it is clear that the MIR must be pension-related – this does not ­assist individuals who perhaps have independent wealth and smaller pension funds.

The securing of the MIR of £20,000 will obviously rule out an awful lot of pension funds, in that it could take several hundred ­thousand pounds to do this. But there is a real mix of people who might be able to use the ­facility.

Beneficiaries of new scheme

So, the following are all possible beneficiaries of the new regime:

• Individuals who have pension funds large enough to secure the MIR and the use the excess
• Defined-benefit (DB) members, who left service, up to the MIR with money purchase arrangements
• Doctors and dentists who have taken advantage of extra statutory concession A9 (where they are allowed to do private work as well), along with other professions where membership of a DB scheme is the norm, but with private work on top pensioned by a personal pension
• Clients who may wish to use the pension fund for a capital ­expenditure, for example, to ­purchase a property abroad
• Clients who wish to provide ­financial support to their children and grandchildren.

Undoubtedly, there are many ­individuals who took benefits from a DB scheme who will reach state pension age, at which point state benefits will become payable, ­potentially meeting the MIR and freeing up the rest of the fund.

One question is whether having satisfied the MIR, individuals will take the rest of the fund minus a tax hit. In my opinion, many will phase out the rest of the fund, hopefully to optimise the tax payable.

With the details only emerging in December for application in April, the time to design products as well as to change systems, ­literature and so on is limited, meaning that ­providers will need to ­identify whether there is a market for ­flexible drawdown.