The UK Government need people to save for their retirement, so that when they eventually stop working they will have enough money of their own to provide an income in retirement. To encourage people to save for retirement very attractive tax incentives have been offered to pension savers, however these tax breaks do come at a price – mainly by placing some restrictions on how the money is taken out of the pension fund.

Imagine how much harder things would be for the Government if somebody who had a large pension fund, was able to take it all when they retired. They could choose to blow it all on extravagant holidays, fast cars and other luxuries. However if they spent it all in the first year, they would have no income for the remaining years of their retirement and would be dependent upon state benefits and the tax payer. Therefore the Government’s primary aim with pension planning is to make the pension last for a person’s entire lifetime.

With respect to income drawdown, the way of controlling how much income is taken from a pension assesses the average life span of people of various ages. This allows them to calculate a percentage, which is then used to calculate how much income can be taken from the fund. The percentage used is based upon your life expectancy, the aim being that (assuming no growth or loss in your fund value other than the income you are taking) the amount taken should be enough to sustain an income for your life. However this is not guaranteed. In very simple terms, if your fund was worth £100,000 and your GAD rate was 5% then you would be able to take £5,000 income from the fund (100% GAD). Currently you can take a maximum of 120% of the GAD limit, using this example £6,000.

All of the above applies to customers who don’t have other retirement income, or retirement income of less than £20,000 from other pension sources.

In April 2010 the Government changed the income drawdown rules, to recognise that for some customers it may be in their best interests to take all of their money out of their pension fund. These people would be able to use their pension fund as they wished, but their circumstances should prevent them becoming a burden on the state. The government would allow a customer to use their pension fund as they wished, as long as the customer had guaranteed pension income of £20,000 per annum from other pension sources. They therefore introduced the concept Flexible Drawdown for people who meet this criterion.

If you meet the MIR then the GAD limits do not apply to you and you can take as much money out of your pension plan as you want. It will be subject to income tax at your marginal level. This means that a customer can use the money as they see fit even if it means paying a higher rate of tax.

Any pension money that is still under your control, after you meet the qualifying criteria, can be used for flexible drawdown. The government have set the rules in a way that the MIR must be made up from regular retirement income - generally from products and sources that are not under you direct control and are guaranteed to be paid to you for your entire life.

If you have not yet touched the pension fund (in other words your fund is uncrystalised) then standard retirement benefits are still available to you – perhaps the most important being the ability to take 25% of the fund as a tax free lump sum. Assuming you qualify for flexible drawdown you can take 25% of an uncrystalised fund tax free. The remaining 75% can be taken as one 75% taxable lump sum, or a series of equal taxable lump sums over a few years. The latter approach may help a customer realise their entire fund at lower tax rates.

Even if you meet the MIR requirements, Flexible Drawdown may not be suitable for you – this is something you may need to consider. To help you we have included a few case studies below to help identify when flexible drawdown may be suitable.

Products that can be used to contribute towards the MIR are :

The HMRC website is not very clear on the use of dependants’ pensions in calculating MIR and our assessments in this section are based upon how providers seem to be addressing this issue. The approach, in our view, is also a common sense approach when viewed in the light of other products HMRC use to address the MIR. HMRC Technical

In simple terms if your partner has a pension and in the event of their death you would receive all or a portion of it for the remainder of your life, then you could build your entitlement from their pension into your MIR calculation. For example, if your partner has an annuity paying them £10,000 per annum and in the event of their death you would continue to receive half of it until your death, then you could claim £5,000 to count towards the MIR calculation.

The £20,000 MIR must be achieved / achievable in the tax year in which you wish to enter flexible drawdown.

You must have ceased to be a member of any “defined benefit” scheme of which you were a member. Even if you are no longer making contributions or are not accruing benefits you will still be classified as a member if the benefits within the scheme are linked to your current salary.

You cannot make any contributions to any money purchase arrangement (or have contributions made on your behalf by any third party) in the tax year in which you wish to go into flexible drawdown. For example, if you make a single contribution to a money purchase scheme in May, you will be ineligible for flexible drawdown for the remainder of that tax year. Assuming no contributions are made in the following tax year, you would be eligible for Flexible Drawdown from the following April.

You can re-start to make pension contributions, if you wish, from the tax year after the tax year you entered flexible drawdown.

This would be particularly frustrating if you have no specific purpose for the money, but would prefer it as a lump sum rather than being forced to buy an income. However it should be remembered that after the standard 25% tax free lump sum entitlement, all further lump sums taken from flexible drawdown are treated as earned income for the purposes of tax.

Our selected provider will enable you to enter income drawdown and take a series of smaller lump sums over a number of consecutive tax years. This could enable a customer to keep the income (lump sums) taken from flexible drawdown below a higher tax threshold. As an example a customer who qualifies for flexible drawdown with £40,000 in a pension fund, would move into a higher rate tax bracket if their income increases by more than £12,000 during the tax year. If they took all of the fund in one go, this would undoubtedly be the case. However if they chose to take it over three consecutive tax years they could avoid paying the higher rate of tax.

In the first year they decide to take £20,000. This being made up of their 25% tax free cash of £10,000 and one third of the remaining £30,000, another £10,000. This £10,000 although subject to tax keeps the client below the higher rate tax band. The customer then takes a further £10,000 for the following two tax years which then exhausts their fund.

These terms and conditions run in tandem with our general business terms and conditions contained on this website.

These additional Flexible Drawdown conditions only apply when a customer has selected to use our Flexible Drawdown service.

Where there is a conflict between our general terms and conditions and these terms and conditions for flexible drawdown, the flexible drawdown terms and conditions shall be given precedent if the customer has applied for the flexible drawdown service.

The flexible drawdown terms and conditions do not apply to any other transactions or services offered by Best Pension Annuity.

When a customer selects to use our flexible drawdown service, engaging us by our web forms, telephone, email or post, these terms and conditions are immediately binding and the service shall have been deemed to commence.

Platinum Financial Consulting (Platinum) trading as Best Pension Annuity operate an ‘utmost good faith’ policy. This means that both Platinum and the customer are working openly and honestly with each other with the genuine aim of concluding this business to their mutual benefit.

All flexible drawdown transactions are on a non-advised basis. This means that it is the customers responsibility to ensure that the product is suitable for their needs. The decision to use flexible drawdown is entirely at the customers own discretion.

We offer one product from one provider for flexible drawdown. We chose a provider that offers the flexible drawdown features discussed on this website.

We will provide all customers with a personalised quote, key features document and information pack BEFORE the customer submits an application.

Genuine circumstances may occur that cause the business not to complete. Platinum has an obligation to treat customers fairly and equally in ‘utmost good faith’. For this reason we have introduced a no fee condition to cover situations where the business does not complete.