New Drawdown Rules – Great news for planners!
Wow! First the new contribution rules, now the new income drawdown rules have been published - Christmas has come early! Financial planners are going to be busy over the next couple of years and it's a great opportunity to help clients get best value from the new rules.
The headline rules follow the proposals from a few months ago, normal drawdown and the option of tax free cash beyond age 75, 55% tax on lump sums on vested funds on death and the new option of flexible drawdown subject to maintaining a secure income of £20,000 p.a. As ever, the devil will be in the detail and we will be reporting in more depth when we have taken it all in.
In the meantime, a few thoughts come to mind on this new area of flexible drawdown:
- The indications are that many providers will not have systems in place by April 2011; some may never change their systems. Clients wanting to take advantage of the new rules will need to switch to providers (such as ourselves I hasten to add) who can give them the flexibility they want. For example it will be interesting to see how providers adapt their illustration systems in line with the new rules as I know work is already underway here on this.
- How many people will go for flexible drawdown in practice? Transferring a large lump of money from your pension fund into your personal estate, possibly at a top tax rate of 50%, might not make a lot of financial sense. Leaving it in a tax exempt fund, taking annual pension withdrawals at maybe a lower rate of tax and having a 55% tax (but no IHT) on any residual lump sum sounds more attractive.
- Those who want flexible drawdown may be put off by the idea of buying an annuity for their minimum secure income requirement, maybe costing £300,000 or more - after all, people in drawdown don't like buying annuities. Help is at hand, though, as Scheme Pension (a form of income drawdown similar to an annuity) counts as secure income - effectively flexible drawdown is available without having to buy an annuity. Only a handful of providers (ourselves included) currently provide Scheme Pensions under SIPPs and SSASs, but we can see this becoming a more popular option.
More to follow as we take the new rules on board, but one thing I can be sure of at this stage is that Curtis Banks will have systems in place to give your clients full flexibility under the new rules when they come into effect on 6 April.
This communication provides general guidance to financial advisers. It is not a full description of our products and services and more information is available on our website at www.curtisbanks.co.uk or by contacting us on (0117) 9107910. It is not intended to be read by clients or potential clients and any such persons should take independent financial advice before taking any action on their pension arrangements.
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