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Occupational Pension Fund Withdrawal PDF Print E-mail
Overview

If you have an Occupational Pension Scheme then you have the option to utilise a different form of pension fund withdrawal (Occupational Drawdown). The type of pension you are in, and the views of the trustees, will determine whether you can take drawdown directly from the scheme or would need to transfer first. Under occupational drawdown you can choose to immediately take a tax-free cash lump sum and then, instead of buying an annuity, leave the remainder of the fund in a tax-efficient environment.

An annual income (taxed as earned income) must be taken from the invested pension fund. This income may vary, set at outset by the Government Actuary's Department (GAD). The maximum limit is derived from tables published by GAD and is based on your fund size, age, sex and the current gilt yield. The limits are revised every five years.

An annuity must eventually be purchased by age 75.

Tax Free Cash

Under occupational drawdown you can take your full entitlement to the schemes tax-free cash. If this is greater than 25% of the non-Protected Rights fund then you will be able to take more cash than you could from personal pension fund withdrawal.

Income

A pension must be taken each year between 35 and 100% of the maximum GAD rate. This income is taxed as earned income under the PAYE system.

Death Benefits

If you die whilst in occupational drawdown your nominated survivor has three different options open to them:- 1) Lump sum payable due to any guarantee period selected,
2) Spouse's pension payable via drawdown, or
3) Spouse's pension payable via annuity purchase

There is no option to take a return of fund less tax.

Advantages

  • You are able to take all of your tax-free cash lump sum entitlement at outset. This could be in excess of 25% of the non-Protected Rights fund.
  • You do not receive a set income but are able to vary it to suit your personal circumstances, between set limits, to supplement other sources of income.
  • You are able to mitigate your liability to personal income tax in certain years.
  • You have the potential to benefit from good investment performance in a tax-efficient environment and to exercise control over your own investment portfolio.
  • If the Inland Revenue prevents you from transferring to a personal pension, but you feel that drawdown suits your situation, you can still utilise a version of the facility.
Disadvantages

  • Taking withdrawals may erode the capital value of the fund, especially if investment returns are poor and a high level of income is taken; this could result in a lower income when the annuity is eventually purchased and could affect the long-term financial security of your spouse.
  • The investment returns may be less than those shown in the illustrations.
  • Annuity rates may be at a worse level when annuity purchase takes place. Although annuity rates generally increase with age, they have fallen dramatically during the past 15 years. This trend may continue.
  • When maximum withdrawals are to be taken, high-income withdrawals may not be sustainable during the deferral period.
  • A careful investment portfolio needs to be constructed which will involve some investment risk. This means the fund value could fall, which could affect your future income levels.
  • Increased flexibility brings increased costs and the need to review arrangements on an on-going basis.
  • There is no guarantee that your future income will be as high as that offered by an annuity purchased today.
  • You may feel the prospect of the future higher income does not compensate for the known income available from an annuity now and for the rest of your life.
  • You may be prevented from withdrawing your chosen level of income due to the action of the GAD limits.
  • The Financial Services Authority (FSA) has particular concerns in relation to mortality risk. If you purchase an annuity, you may benefit from a cross subsidy from those annuitants that die relatively early. This cross subsidy is not present with Drawdown and so to provide a comparable income, a higher investment return will be required. The impact of mortality can be expressed as an annual percentage rate by which the net investment performance of the remaining personal pension fund would have to exceed the interest rate implicit in an annuity in order to break even. This effect has become known as the 'mortality drag'.
  • The death benefits are not as flexible as personal drawdown.
Critical Yield

Product providers using a common prescribed basis illustrate critical yields.
There are two types (A and B).

Type A - the growth rate needed on the "drawdown" investment sufficient to provide and maintain an income equal to that obtainable under an equivalent immediate annuity.

Type B - the growth rates necessary to provide and maintain a selected level of income.

Suitability

Occupational drawdown can be suitable for a whole range of differing needs and financial situations, however it is generally accepted that the potential disadvantages and the inherent risks involved require the individual client to be a relatively sophisticated investor, who is capable of fully understanding the risks.

Occupational drawdown will suit clients currently in occupational pensions who are interested in the benefits of drawdown but are either prevented from transferring to a personal pension or would receive greater tax-free cash under the occupational scheme.
 
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