During this period of low annuity rates, it may be prudent for those with larger pension funds to use the drawdown route rather than take an annuity. This can give flexibility for the future as an annuity can be taken later, if rates increase.
An example of the difference between an annuity and a drawdown pension taking maximum income is shown below.
Basis: Male, aged 60, level annuity with 5 year guarantee, drawdown illustration based on 25 years.
£100,000 Pension Fund
After maximum Pension Commencement Lump Sum (formerly Tax Free Cash) of 25% = £75,000
Annuity £4,155 per annum
Drawdown £5,962 per annum
£200,000 Pension Fund
After maximum Pension Commencement Lump Sum (formerly Tax Free Cash) of 25% = £150,000
Annuity £8,313 per annum
Drawdown £11,925 per annum
For capped drawdown the maximum income will be 150% of the equivalent annuity, as determined on rate tables provided to HMRC by the Government Actuary's Department (GAD) and based upon the pension value. The upper income limit is set for three years. Income can be varied anywhere between the upper limit and zero, giving a greater degree of flexibility over conventional annuities.
For your information, announced during the March budget was the Government’s intention to permit unlimited income withdrawals from SIPP’s such as yours, albeit subject to income tax.
Although final details are yet to be confirmed, this should give you a much greater degree of flexibility from April 2015.
These options may not be suitable for everyone and pension advice should be tailored to individual circumstances. Lewis ensure that each of their clients received a tailored financial planning service which takes their entire situation into account before offering advice.
Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor. The value of your investment can go down as well as up and you may not get back the full amount invested.
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