I am sat in my office in Windsor, Berkshire studying for my next exam (J05) and reviewing the new Capped and Flexible Drawdown pension changes. Capped as you might know prevents a client taking out an income that they might need at the time because they have to adhere to the GAD limits which are based on the Redemption Yield of UK 15 Year gilts (have I lost anyone yet – bear with me it gets simpler!!). These are relatively low at the moment however for a male aged 65 the rate is £63 per £1000 of pension, so based on a retirement fund of £400,000 the maximum that you could possibly draw, in that year at retirement is £25,200 per annum. Lets assume for one moment that you are this Male (sorry ladies!). Now £25,200 might pay for your day to day living expenses – depending on the quality of wine you drink! But it’s hardly going to pay for a World Cruise in the year that you retire! Or pay for the porters to help you up Kilimanjaro on your zimmer frame – if you like climbing mountains?!
However assuming you fit the criteria, Flexible Drawdown will allow you to take an income to suit your needs at the time. This is especially good for clients in their early retirement because they might have used their Tax Free Cash paying off their mortgage but still want to do the World Cruise or climb a mountain before they get too old. Previosuly you would have been restricted due to the drawdown limits BUT now with Flexible Drawdown you can take pretty much take what you want – however you do have to qualify by meeting a minimum income currently set at £20,000.
So my thinking for some clients would be that they could buy an annuity to meet the limits add on their State Pensions plus any other Scheme Pensions, match the £20,000 minimum and then move into Flexible Drawdown instead of Capped. This would then allow you to take the necessary income to fund your cruise or climb up Kilimanjaro like I did several years ago! I could have done with a zimmer frame then and I am only 45!!