One of the most interesting changes to Pensions Legislation sees the introduction of the Flexible Drawdown Pension.
Previously, on reaching age 55, an individual could start to draw an unsecured pension from their pension fund, which was restricted to 120% of the Government Actuary Rate (GAD Rate) applicable to their age. On turning 75, this became an alternatively secured pension but was reduced to 90% of the applicable GAD Rate.
The age differential has now been withdrawn and there are two options available to someone wishing to draw benefits at age 55 or older:
- Drawdown Pension with maximum income of 100% of the applicable GAD Rate; or
- Flexible Drawdown Pension with no limit on the maximum drawdown.
In order to opt for flexible drawdown, the individual has to be able to prove that they have a minimum pension income of £20,000 per annum. This can be achieved by ring fencing part of the assets in their pension fund, but the surplus assets can then be withdrawn.
This means that an individual with surplus assets of £1 Million at age 55 could elect to take £250,000 as tax free cash and then draw out the whole of the remaining £750,000, subject to income tax at their marginal rate. At a 50% tax rate, they would suffer tax of £375,000, leaving them with a net £625,000 in their hands to use as they wished.
In view of George Osborne’s recent comments that the 50% tax rate will only be temporary, if the top rate does returns to 40% at some point in the not too distant future, then that same individual may then be able withdraw the net sum of £700,000 from his pension fund at an effective tax rate of only 30%.
