Phased Drawdown
Phased
Drawdown has all the same advantages and disadvantages of Income
Withdrawal, but there are some unique features to this method of taking
your benefits.
If you're under 75 and have no immediate requirement for
all of the tax free cash available from your pension then this could be
a useful way of taking your benefits. Effectively you take a portion of
the tax-free cash to use as income, and then take a taxable income
through income withdrawal.
Advantages
of Phased Drawdown
- In the
event of your death the unvested element is paid out tax-free
- The
initially unused tax-free cash can be taken out at any time
- It
keeps more of your funds in a tax efficient environment
- The
income it provides is partly tax-free cash, and partly taxable
- Ideal
for those who are retiring gradually and who are still working and
earning
The biggest
disadvantage of Phased Drawdown, is that it does not give access to the
entire tax-free lump sum in one go. The tax-free cash remains 25% of the
unvested element, so if your funds grow your tax-free cash entitlement
grows, and vice versa. It is also not possible to used Phased Drawdown
for Protected Rights funds.
Phased
Drawdown - Example
e.g. You have a requirement for an income
of £2,875 each year, and total funds of £200,000. Therefore assuming the
maximum percentage of withdrawal under income withdrawal for your
circumstances is 5%, you would need to use £10,000 of your fund to
provide this level of income.
£10,000 of the fund is used - the maximum
tax free cash from this £2,500
£7,500 of the £10,000 remains and is
invested in an income withdrawal contract. At a rate of 5% this would
provide a taxable income of £375 p.a
Therefore the total level of money you
would receive would be £2,875, and only £375 of this money is counted as
taxable income, as the other £2,500 is part of your tax free cash
You would
then have funds remaining of £190,000 unvested, £7,125 vested in an
income withdrawal contract, and would have taken £2,500 tax-free, and
£375 as a taxable income.
Each year
this process is repeated, and the amount of tax-free cash can be varied
each year.
If
you want to know more about how Phased Drawdown could benefit you, then
please contact us
now to discuss without obligation. |
