Pension Entitlement and Drawdown

Last Updated: 17 Sep 2020
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What Is Drawdown?

To understand pension entitlement you need to understand that a drawdown or unsecured plan is a special characteristic of  schemes like SIPPs (Self-Invested Pension Plans) which allows plan holders to use a part or their entire fund as capital for a wide range of investment portfolios and business opportunities.

The fund still gains interest and together with the profits made from the investments, can be both exempted from tax. There are two types of drawdown; capped drawdown and flexible drawdown. Find Out More About UK Pensions.

Issues Around Drawdown

Pension Drawdown

Previously, there was no maximum amount of income that could be drawn from your retirement fund. Right now, the Government Actuary’s Department is reviewing the maximum rates in which plan holders can use up as capital for different investment portfolios and business opportunities. This is reviewed every three (3) years until the plan holder is 75.

Afterwards, it will be reviewed on an annual basis. Once the plan holders reach 75 years of age, they have the option to take tax-free lump sum payments regardless of whether they have done an income drawdown or not.

Two Types of Drawdown

Type 1: Capped Drawdown

A capped pension drawdown1  puts a limit to the amount of income that can be drawn from the fund. Right now, that amount is about £6,800 a year for every £100,000 fund you have at age 65.

Type 2: Flexible Drawdown

A flexible drawdown allows the plan holders to withdraw whatever amount they want from their pension fund at any period of time. In order for this to be possible, you have to provide proof that you are already receiving a secure retirement fund of not less than £20,000 annually and that you have no more contributions to fulfill.

Advantages Of A Drawdown

An income drawdown is most suitable for profit-driven individuals who can foresee a continuous growth rate of their fund due to different types of business transactions.

The advantages of a capped drawdown include the following:

  • Take either a tax-free lump sum2  or a regular income upon retirement
  • Flexibility on the amount of income received subject to an annual maximum
  • Funds can still be used for investments to allow for greater interest growth
  • Funds can be passed on to beneficiaries

The advantages of a flexible drawdown are the same except that there is no annual maximum for the income that the plan holder receives.

Disadvantages Of A Drawdown

Pension information

The main disadvantage of the two types of drawdown is that the fund is vulnerable to losing value due to poor investment turnouts and inflation-related causes.

If you are considering using drawdown, you can seek expert advice from one of our reputed financial advisers3  to ensure that you are making the best financial decision to satisfy your specific lifestyle needs and business expectations.

Pension Entitlement And What You Should Know

It is important to know about the different types of plans that would match your individual needs and expectations. We’ve prepared a detailed head-to-head comparison between qrops and sipps. This way, you can find out what pension entitlement you want to enjoy during old age. Read on to find out more about it.

Basic State Pension (BSP)

The maximum available pension entitlement from Basic State Pension (BSP4 ) is £107.45 per week for 2012-13. When you have reached the State Pension Age (SPA5 ) and you have not paid enough National Insurance Contributions (NICs) or have not satisfied the maximum qualifying years, then you will get a lower amount subject to computations. Moreover, you may be entitled to a BSP increase of up to £64.40 a week depending on the NICs of your spouse or civil partner. Read our in depth article for Old Age Pension.

State Second Pension (S2P)

Your pension entitlement from a S2P will be based upon on your earnings between the Lower and Upper Earnings Limits. Another factor would be whether you had contracted-out through a plan or not. The S2P was first established in 1978 but it has revised its calculation, since 6th April 2002, to grant more benefits to low and moderate earners.

Graduated Retirement Plan

Your graduated retirement benefit is dependent on the number of contributions you have made from April 1961 to April 1975. For every graduated contribution of £7.50 (male) or £9 (female), you are entitled to 12.51 pence. After 5th April 2010, women of State Pension Age will be entitled to the same graduated retirement benefit as men have. Currently, contributions from the plan are being divided by £7.50.

What Is Pension Credit?

It is a way of providing income to anyone 60 years old and above of at least:

  • £142.70 a week (single individual)
  • £217.90 a week (spouses/civil partners)

Although it is the applied pension entitlement, you can get an additional £32.60 and £58.20 a week if you are a registered carer and a registered disabled person, respectively. Pensioners who are more than 65 years old can also receive additional benefits up to:

  • £18.54 a week (single individual)
  • £23.73 a week (spouses/civil partners)

Once you reach the age of 80, your state pension income will get a 25 pence increase each week. You can find our article on Pension Rates very beneficial for your pension plans.

Pension Entitlement for Dependents

If you have dependent children, your rate is:

  • £8.10 for the oldest child
  • £11.35 for each other child who is entitled to Child Benefit from the state

If you have a dependent spouse, civil partner or child you are looking after, the rate will be £61.85. All the benefits for dependents can only be given to you if you qualify to receive such before 5th April 2003. From 6th April 2010, you will not be entitled to these increases. If you are already getting the increased rate at 6th April 2010, you will continue to receive this amount if you meet the conditions up to April 2020. You can contact us and speak to our reputed financial adviser for more information on pension entitlement.

Read More About Eligibility And Advantages Of Foreign Pensions.

John lawson rndlg

John Lawson

John advises business, individuals, and organisations on pension planning. As you’ve probably realised by now, we’re invested in helping people like yourself understand a little bit more about how equity release options work.

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