Income Drawdown

Income drawdown is a method withdrawing benefits from a UK Registered Pension Scheme. In theory, it is available under any money purchase pension scheme. However, it is, in practice, rarely offered by occupational pensions and is therefore generally only available to those who own, or transfer to, a Personal Pension.

Capped income drawdown permits the policy holder to withdraw an annual income between nothing and a maximum based on the initial fund value, their age at the time, and the current rates set by the UK Government Actuary's Department. The maximum is revised every three years until the 75th birthday and thereafter at annual intervals. The individual can choose to buy an annuity at any time.

Flexible income drawdown allowed anyone who could prove they had enough qualifying secure pension earnings, to have unlimited access to their other pension fund. For flexible drawdown declarations made between 6 April 2011 and 26 March 2014, this amount was £20,000. For flexible drawdown declarations made on or after 27 March 2014, the amount is £12,000.

Flexi-Access Drawdown is the new form of income drawdown. In the March 2014 Budget, George Osborne announced that from 6 April 2015, there would no longer be any restrictions for those wishing to access their pensions.

All individuals can now have unlimited access to their pension fund from the age of 55. This permits unlimited withdrawals. All withdrawals are treated as taxable UK income. From 6 April 2015, a capped drawdown scheme can be converted to flexi-access drawdown.

Income drawdown commences when the individual designates funds for it. At this time, they are permitted to take a Pension Commencement Lump Sum (a tax free lump sum of up to one third of the amount designated for income, i.e., 25% of the total taken at that time) and a life annuity is not purchased with the remainder. The Income Drawdown fund is also known as a crystallised pension fund. It is possible to crystallise a pension in stages.

Uncrystalised Funds Pension Lump Sums or UFPLS, is an additional flexible way to take pension benefits. Rather than move the whole fund into a drawdown arrangement, ad-hoc lump sums can be taken from the pension. Any withdrawals will allow 25% to be taken tax free with the remaining 75% of the fund treated as taxable income.

The "mandatory annuitisation of pension funds" dates back to the Finance Act 1921. A requirement to annuitise between the ages of 60 and 70 was introduced by the Finance Act 1956. The upper age limit was increased to 75 by the Finance Act 1976.

From 1995, in response to falling annuity rates, Income Drawdown was introduced as an alternative way of drawing an income and, under the original rules, purchasing an annuity no later than the 75th birthday.

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