Bend-over-backwards-flexible drawdown

Among the changes and conditions brought by the new drawdown rules is the tax position on death in drawdown – namely the tax charge on a lump sum death benefit rising from 35% to 55%. That has led many to predict greater use of phased drawdown, probably in their eyes using capped drawdown.

The theory goes that you put just enough of the fund into drawdown that the 25% PCLS (tax-free cash (TFC) in common parlance) plus the maximum permitted income together meet the client’s “income” needs. That will get a bit tougher from 6 April when the maximum income withdrawal will fall to 100% of the new, lower GAD rate but the theory holds. The process is repeated in subsequent years, taking account of the income that can be taken from the funds put into drawdown in previous years.

It is potentially tax-efficient on two fronts: part of the “income” being tax-free cash and more of the fund being left undrawn (and therefore not normally liable to tax on a lump sum death benefit in the event of the client’s death). It’s quite complex – I’ve skated over a few important details – and it can be expensive. Well, depending on how it’s administered, flexible drawdown could achieve the same, only in a cleverer way.

Some of the people I speak to seem to envisage flexible drawdown being a one-step action: all the fund is put into flexible drawdown and income is drawn in whatever way wished thereafter. As I bloggged previously, there could be interesting income payment possibilities, depending on what SIPP administrators allowed and how they utilised bank payment facilities. But if flexible drawdown were operated differently, could it be the ultimate phased drawdown?

And touch your toes!

Imagine that instead of putting sufficient funds into drawdown to generate your client’s desired level of “income” based on TFC plus maximum GAD from the residual drawdown fund (as you would with capped drawdown), you instead put funds into drawdown equal to the income your client wishes to take. In other words, under this version of flexible drawdown – if any provider chooses to offer it – much less of the fund is put into drawdown but all of what is put into drawdown is immediately withdrawn: 25% as TFC and the reminder as taxed income.

Let’s take a crude example with rounded figures and ignoring income tax – unrealistic, I know, but it’s just to illustrate the theory. Rather than a drawdown fund of, say, £80k generating £20k of TFC and a max GAD income of, say, £4k (say a male client aged around mid 60s), you instead put just £24k into flexible drawdown generating £6k of TFC and the remaining £18k is immediately withdrawn as income. Assuming an original SIPP fund of £400k, under the first scenario £320k would remain undrawn and therefore normally not liable to a tax charge in the event of the member’s death; in the second scenario £376k would remain undrawn (i.e. the whole fund).

So another potential option for financial planners to consider in deciding whether capped or flexible drawdown is more suitable. In this case, perhaps the difference between touch-your-toes flexible and bend-over-backwards-and-touch-your-toes flexible!

Do you think I’ve missed something? Give the comments box below a bash, why not?

Advertisements

About sipphound

Chewing over pensions, saving and retirement issues. Sniffing around financial planning, personal finance, investing and behavioural influences. All personal opinions, no company represented and no advice given.
This entry was posted in Drawdown, SIPPs and tagged , , , , , , , . Bookmark the permalink.

2 Responses to Bend-over-backwards-flexible drawdown

  1. Pingback: Drawdown Rhetoric Should Be Capped | SIPP Hound's blog

  2. SIPP Hound’s blog. It is without doubt one of the most useful that I’ve read through in a long time. We’ve been seeking this update..

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s