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Pension Drawdown Rules

What are the rules regarding drawing down on your pension? Find out here.

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By Tony Stevens  | Pensions Expert

Updated: 26th August 2019 *

Following the HMRC pension drawdown rules brought into place in 2015, we’ve had many, many enquiries from people wanting to know how the new rules will affect them.  

Individuals now have more flexibility over when they can access, and what they can do, with their pension funds.

This is why it is essential you get the right advice. Fortunately, the advisors we work with are experts when it comes to the new drawdown rules, so have a chat today.

They will help familiarise your with all the potential Pension Freedom options, and the rules surrounding them. Read on to find out more, or make an enquiry and we’ll put you in touch with a pension drawdown expert.

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What are the limits to pension income drawdowns?

Lots of people want to know what income drawdown limits following the shakeup to the income drawdown rules four years ago.

As well as limitations surrounding when and how you could access your funds, there were also restrictions around who was eligible to use income drawdown based on contribution and the value of the pot. It was also a mandatory requirement to have purchased an annuity by the age of 75 and many schemes only included the option to buy an annuity at retirement.

Many pension providers will not accept transfers of less than £10k. Although in principle there should be no minimum pot value for drawdown, the main issue comes down to the fees associated with this product.

After paying out for fixed costs such as setup and annual management fees (not to mention variable transaction charges), the charges could have a disproportionate impact on a small pension.

Regardless of how much is in your pot, you qualify to take out 25% of your funds tax free (the tax-free cash) and the remainder will be taxed at your Income Tax rate.

What were the new pension drawdown options introduced in 2015?

Under the new government rules, some schemes allow combine some of the income drawdown options listed below.

However, not all providers offer this, so be sure to compare your options - get in touch for specialist advice.

It’s also important to be aware that there are minimum and rules and implications attached to the different ways to take income from your pension funds.

Buying an annuity

Most providers allow you to withdraw a maximum of 25% of your pension pot as a tax-free lump sum (some older policies may allow you to withdraw more than 25%). The rest may then be converted into a taxable income for life , and this is referred to as an annuity. You use your pension funds to purchase an annuity and do not have access to the funds as they have been used to provide an income throughout retirement.

Setting up a flexi-access drawdown

Flexi-access drawdown again allows you to withdraw a quarter of your pension funds (or a specified allocated amount, provided it doesn’t exceed 25%). If you take all 25% then your fund becomes “crystallized” (i.e. freed up so you have access to the funds), but if you prefer to take the tax free in a series of withdrawals it is uncrystallized.

The rest of your pension pot can be invested, which offers the opportunity for growth.

Unlike with a lifetime annuity, your income isn’t guaranteed for life with this option, so you need to keep a close eye on your investments. You retain access to the fund and if you pass away the remaining capital can be left to your loved ones.

Make ad hoc cash withdrawals

You can also use your existing pension pot to withdraw cash as and when you please, leaving the remaining funds to grow. Each withdrawal after the 25% tax-free cash has been taken will be classed as taxable income - so consider the implications if you have another source of earnings.

There may also be charges each time you make a withdrawal and / or limits on how many withdrawals you can make each year - this varies by provider.

Withdraw your whole pension pot

If you wish, you have the opportunity to withdraw all the cash in one go. Again, the first 25% will be tax-free, and the remainder will be added to any other income and taxed in accordance with the tax bracket you fall under.

Cashing in your whole pension pot can be very risky, so be sure to seek advice before doing so.

Mix up your income drawdown pension scheme

Some providers give you the opportunity to enter a combined plan, allowing you to mix and match investments to suit your needs.

Which option or combined plan is right for you will depend on a number of factors. To help you understand the best options are for your current circumstances, speak to one of the specialists we work with.

Alternatively, you can check out the government-backed Pension Wise service.

What are the rules for pension drawdown after age 75?

The impact that reaching age 75 has on your pension will depend on what plan you’ve chosen and how you’ve accessed it so far.

For example, you may have a defined contribution pension pot that you haven’t withdrawn any funds from yet. Some pension drawdown providers do still stipulate that you have to buy an annuity by 75, particularly those set up before April 2015.

What are the pension drawdown rules after death?

If you die before age 75, your pot can be paid to your beneficiaries tax-free. They can choose to take it as an annuity, a lump sum or through flexible drawdown.

If you die over the age of 75, your pension pot can be paid to your beneficiaries, but all payments will be subject to income tax at their marginal rate.

Why you should speak a mortgage expert

Not only have we helped countless people find the right mortgage, we’ve also advised many customers on the best pension drawdown options to suit their needs.

In fact, our customers consistently rate us 5 stars on Feefo, mainly due to our high levels of service, but also because we offer offers a 5-star service with access to expert pensions advisors who:

  • Have a working relationship with expert pension advisors, including those specialising in pension fund drawdown and the rules surrounding them.
  • Already know the pension providers to go to as they successfully arrange pension drawdown products already.

Talk to an expert in pension income drawdown rules today

If you require more information surrounding the changes to drawdown pension rules for 2019, call us on 0808 189 2301 or make an enquiry.

Updated: 26th August 2019
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FCA disclaimer

*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The info on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs. Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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