Flexible Pension Drawdown – Some Things you need to know

The government has changed the legislation applying to the drawdown of pension funds.

Here are some things to bear in mind...

Legislation

The legislation on flexiblepension drawdown alters sections 165 and 167 of the Finance Act 2004 so that the new drawdown pension maximum limit of 100% does not apply if:

• the individual meets the flexible pension drawdown conditions, and
• the individual makes a valid declaration to the scheme administrator to that effect, and
• the declaration is accepted by the scheme administrator.

Minimum Income Requirement

One of the requirements for an individual to meet the flexible pension drawdown conditions for an arrangement is that they satisfy the minimum income requirement at the relevant time. The relevant time simply means at the point of making a valid declaration. This is actually an important addition as it means that, once an arrangement meets the flexible pension drawdown condition, this arrangement has passed the test.

Dependents Submissions

An important point is that the right to flexible pension drawdown from any arrangement is not automatically passed on to a dependant. The dependant will have to make their own submission providing they can meet the requirements in their own right.

No contributions

The other requirements for an individual to meet the flexible pension drawdown conditions for an arrangement are that:

• no contributions are paid to a money purchase scheme by the individual or on their behalf in the tax year in which the declaration is made.
• at the time of any declaration the individual is not an active member of a defined benefits or cash balance arrangement.

Minimum Income

The minimum income requirement means that, at the time of making a declaration, the individual has secured pension income in payment of at least £20,000 gross per annum from a lifetime annuity, scheme pension, state pension (social security pensions and/or financial assistance schemes) or a combination of one or more of these.

Members

A key point is that scheme pension paid by the scheme administrator under a money purchase arrangement does not count as secured income if the pension scheme has less than 20 pensioner members entitled to scheme pension. Even if there are 20 at the time the declaration is made, it is unclear what action the scheme administrator will need to take if one leaves or dies! The same applies to a defined benefit arrangement.

Tax year Planning

Careful planning will be needed ahead of the tax year in which the individual plans to declare for flexible pension drawdown as just one payment will mean having to wait a full year before you get another chance to declare.

Tax bill

Equally, paying a contribution in the tax year after you have declared for flexible pension drawdown would invalidate the declaration and in some circumstances this could lead to an unauthorised payment being made and a consequent tax bill.

Acceptance

Once the declaration has been accepted the future annual allowance for tax relieved pension contributions is reduced to zero. This is the case even if they are yet to take any income under flexible drawdown and it applies to all future tax years, not just the one immediately after the year in which the individual declared for flexible pension drawdown.

Input periods

Finally, don't forget that you need to take account of pension input periods (PIPs) as well as the legislation talks about tax years and not annual allowance PIPs. For example a standalone contribution of £10,000 paid on 1 March 2012 will have a PIP ending in the 2012/13 tax year. However, no physical contribution will have been paid in the 2012/13 tax year so a valid declaration for flexible pension drawdown could be made anytime from 6 April 2012 to 5 April 2013.