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Flexible Drawdown

Why use the Collective Retirement Account for flexible drawdown?

For those customers with £12,000 guaranteed pension income, the CRA can provide a very flexible way of accessing their pension pot to provide immediate income without restriction in advance of the Government’s proposed pension income changes from April 2015. Flexible drawdown is an option you would normally associate with a SIPP, but the CRA has this facility and importantly comes without many of the charges normally associated with investing in a SIPP.Quote: 'I require total control over my pension income, ‘so I can take whatever income I need, whenever I need it' Judith Rowntree

Case study Judith Rowntree*

  • Judith Rowntree is a 63 year old retired GP Practice Manager.
  • She is now receiving a total pension of £15,000 a year from an NHS final salary Pension Scheme.
  • Judith has two additional personal pension pots worth £180,000 in total.
  • Judith wants to boost her income by £15,000 over the next year to cover a luxury cruise.
  • Judith is considering two options:

Phasing from Capped Drawdown Option 1

  • Transfer the two existing personal pensions to the CRA.
  • Crystallised fund required = £49,936.
  • Tax free cash = £12,484.
  • Residual drawdown fund = £37,452.
  • Gross max annual income = £3,145.96**.
  • Income net of basic rate tax of (20%) = £2,516.
  • Total income generated for the next year = £15,000.

Phasing from Flexible Drawdown Option 2

Judith is eligible to use her personal pension savings for flexible drawdown as her pension income of £15,000 from the NHS final salary Pension Scheme and State Pension meets the £12,000 minimum income requirement for flexible drawdown.

  • Transfer the two existing personal pensions to the CRA.
  • Crystallised fund required = £17,647.
  • Tax free cash = £4,412.
  • Residual drawdown fund of £13,235.
  • Gross maximum annual income of £13,235.
  • Income net of basic rate tax of (20%) = £10,588.
  • Total income generated for the next year = £15,000.

The advantages of Judith opting for flexible drawdown

  1. Flexible drawdown enables Judith to achieve her immediate income needs whilst crystalising 65% less than the capped drawdown route. This means that less of Judith’s pension savings are used to provide her net income requirements each year, which benefits from:
    – having 25% of her remaining savings available to provide a tax-free income in the future
    – reducing the tax liability in her remaining savings if she dies before age 75.
  2. Crystallised pension money is subject to a 55% tax charge upon death – flexible drawdown has given Judith and her estate a significant death benefit advantage.

 

Flexible drawdown enables eligible customers to crystallise what is required for immediate income, leaving the remainder uncrystallised for future income needs. Adrian Walker, Head of Retirement Planning, Skandia, May 2012

 

For those customers under 75, flexible drawdown can offer a valuable death benefit advantage. Phasing pension savings to meet a target income maximises uncrystallised funds that will not attract a 55% tax charge on death.

* Judith Rowntree is a fictitious character created for the purposes of this case study.
** Based on GAD rates as at January 2014.

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