The concept of unsecured pension and alternatively secured pension no longer exists. Consumers with a personal or stakeholder pension can, at any time from age 55 onwards, start taking their pension benefits by either purchasing an annuity or entering a drawdown pension arrangement.
You can use the Your Pension: it's time to choose' factsheet, from the Money Advice Service as part of the information you give to customers to outline the key information about these products.
On Thursday 13 March we held a webinar on income drawdown which was viewed by over 600 people. You can now view the video on demand and download the slides. All information in the webinar was correct as of Thursday 13 March 2014.
A drawdown pension is an alternative to buying an annuity and allows a consumer to leave their pension fund invested while drawing an income from their pension fund by using income withdrawals or by using a ‘short-term annuity’. The income withdrawals can be a capped or flexible drawdown pension arrangement.
Consumers can leave their pension fund invested in a drawdown arrangement and make withdrawals throughout their retirement, subject to an annual cap. The maximum withdrawal of income that a consumer can draw down is capped at 150% of the equivalent annuity that could have been bought with the value of the fund.
The Government Actuarial Department drawdown tables are used to determine the amount. This maximum capped amount must be calculated at least every three years until age 75 and annually thereafter.
Individuals able to demonstrate that they have a secure pension income for life of at least £12,000 a year, otherwise known as the Minimum Income Requirement, will have full access to their drawdown funds without any annual cap.
All withdrawals from drawdown funds will be subject to tax as pension income.
We require authorised firms and advisers to keep up to date about potential changes in the law.
You must have regard to, and give appropriate warnings about, material risks that might have an adverse effect on a client if the client takes, or refrains from taking, your advice. Anyone being recommended to enter into a drawdown pension should have the potential tax consequences explained clearly to them by their adviser.
A drawdown pension, using income withdrawal or using short-term annuities, is complex and is not suitable for everyone. It is riskier than an annuity as the income received is not guaranteed and will vary depending on the value and performance of underlying assets.
Advisers must make sure their customers are aware of the risks involved in choosing a drawdown pension. The customer is exposed to similar risks if the drawdown pension uses short-term annuities.
The risks identified are for both capped drawdown and flexible drawdown pension arrangements.
The particular areas advisers should focus on are:
The customer will be taking an income from a fund that remains invested in the stock market or from an asset which is subject to market conditions.
Depending on the levels of drawdown (or amount of the short term annuity) and charges (which tend to be high for income withdrawal plans), a high-risk investment strategy may be necessary to ensure that:
You should consider the customer's personal and financial circumstances carefully, in particular:
Copyright © 2016 FCA. All Rights Reserved.