Adviser > Individual > Drawdown > Income
Income
When can my client start to take income?
If your client has crystallised their retirement fund they can
- withdraw income as a drawdown pension immediately or
- take TFC only and delay taking income until a future date.
Taking income from the crystallised fund
The maximum amount of income is limited to 100% of the client's Government Actuary's Department (GAD) rate when applied to the crystallised fund value, based on their age, gender (until 20th December 2012) and current interest rates. The amount of income taken is flexible and may be changed at any time between zero and this upper limit. Clients who still have some income may choose to take lower income during this period and increase it when necessary.
Effect of tax on retirement fund
The tax treatment of a crystallised retirement fund is less advantageous than an uncrystallised one. Some clients withdraw their maximum income at outset to make new contributions into the pension plan. This is advantageous where the pension plan can hold both uncrystallised and crystallised funds. Clients who do not require the full value of their tax-free cash will usually leave part of their fund uncrystallised to maintain tax advantages and may make contributions to this part of the plan.
Can a client under 55, who has crystallised their retirement benefits and accessed their TFC, take income?
| Plan is fully crystallised | Plan is partially crystallised |
|---|---|
| If your client takes maximum TFC the whole fund is crystallised and income is available from the whole fund. | If your client has only crystallised part of the fund, they will only have access to income from the crystallised part of the fund up to the maximum GAD level, and are unable to crystallise further assets until 55. |
How is the maximum GAD income calculated?
GAD amount/limits are based on 'relevant annuity' rates published by the Government Actuary's Department (GAD).
You can access the GAD tables on the HM Revenue & Customs (HMRC) website at www.hmrc.gov.uk/pensionschemes/gad-tables.htm.
The minimum and maximum limits that can be withdrawn in each pension year for drawdown pensions are 0% and 100% of the basis amount.
Income can vary between these limits. Pension years are the 12 month consecutive periods starting from the date when a drawdown pension is first paid.
The rates
The rates used in the GAD tables are based on 15 year gilt yields on the 15th of the month before the date income withdrawal begins (known as the 'initial reference date'), rounded down to the lower 0.25%.
The gilt yields are published in the Financial Times, you can also find them published on Scottish Life's Technical Central website www.scottishlife.co.uk/technicalcentral where the appropriate rate is published each month in the 'Rates & Factors' section.
HMRC base the income drawdown limits on the equivalent annuity that could be bought from the available fund. The GAD tables therefore show the amount of relevant yearly annuity that can be provided for every £1,000 of purchase price, depending on age, gender and the appropriate rounded gilt rate.
The same rates apply for protected rights and non–protected rights.
The annuity is assumed to be:
- level
- with no guarantee
- single life.
Download our Income Drawdown leaflet on Calculating the Income Limits for more detailed information and examples on calculating GAD amounts.
My client has an income drawdown plan. Can they still purchase an annuity?
Your client can buy an annuity at any time after investing in an income drawdown plan.
Previously HMRC said that buying an annuity from a drawdown pension under the age of 55 would be classed as an unauthorised payment. However, they have since confirmed that this is no longer the case.
| Advantages of an annuity | Disadvantages of an annuity |
|---|---|
|
|
Your client has to choose between maximum security or flexibility.
A decision has to be made by the client at the outset whether to
- purchase a secured level of income or
- accept reduced security in exchange for flexibility.
Once an annuity is bought this decision cannot be changed at a later date.
Sometimes it makes sense for the client to put off making this decision until their circumstances are less likely to change, for example when it is clear if a spouse's pension will be required.
When to buy an annuity
Generally speaking clients are likely to get a better annuity conversion rate the older they are. However this could be offset by changes in market conditions. If interest rates fall then the annuity conversion rate will be less advantageous, if they rise it could get better.
This is normally less of a priority than the requirement to secure a known level of income but may be an influencing factor in your client's decision as to when to commit to an annuity.
For more information on other retirement options, please visit our web page on at retirement options.
Should I advise my client to stop or reduce income withdrawals to avoid capital erosion if investment returns are less than expected?
This depends on your client's actual need for income and whether they intend to reinvest it:
| If your client does not intend to reinvest the money |
|---|
| Your client should withdraw the minimum amount of income to meet their financial requirements, leaving the remainder of their money in a tax efficient environment. |
| If your client intends to reinvest the money |
| Your client will be able to reduce or stop their income when the markets fall. However the tax advantages of recycling the funds back into an uncrystallised account still apply. Please visit our webpage on TFC recycling. |
As pensions are usually long term investments, it is important to pick a suitable strategy for your client at the outset rather than reacting to short term changes. This strategy should take into account the possibility of a correction.
For professional advisers only
