Glossary of Income Drawdown Terms
Welcome to the Income Drawdown Section!
When approaching retirement and thinking about income drawdown it is important to look at all the factors. Look into death benefits, flexible drawdown, new rules, comparisons with annuities, tax free cash, the best providers, and IHT.
If you take an annuity young (especially early retirement) income may be much lower than if you went into Drawdown and took the annuity older. There are also inheritance tax benefits to drawdown. As with all investment decisions you must balance risk and reward . Income from drawdown is at the mercy of fund performance. ID is normally only appropriate if you have £100K+ in your pension pot.
- Annuitant: Another way of describing an individual who had taken out an annuity.
- Benefit Crystallisation Event: This is an umbrella term which could apply to several different situations once you take benefits. For example, if you move money into a drawdown account, these funds plus tax-free cash taken will be set against the lifetime allowance (which is £1.8 million but dropping to £1.5 million in 2017). Any benefits taken that goes beyond this level will be subject to a tax charge of 55%. It is unlikely that many people will be affected by this however.
- Contracted Out Pensions: These are sums of cash that have grown in a pension after they have been contracted out of a SERP (now called State Second Pension). Other names for this type of pension include guaranteed minimum pension or protected rights. There is a Contracted Out Pension Helpline which should be phoned by those unsure if they fit into this bracket. It is necessary to have your National Insurance number available.
- Critical Yield: This is a figure that tells you how much you are likely to earn. The figures are divided into Type A and Type B.
- GAD: Otherwise known as the Government Actuary’s Department, this group is in charge of collating the necessary data to correctly calculate each individual’s maximum withdrawal limit for ASPs and income drawdown.
- HMRC: The Inland Revenue has joined HM Customs & Excise to form Her Majesty’s Revenue and Customs.
- Lifetime Allowance: Everyone is allowed a certain amount of benefits which can be drawn from his/her pension during their life which will not be hit with tax charges. The current level of lifetime allowance is £1.8 million but this will drop to £1.5 million in 2017. Any benefits that go above that level will be hit with a 55% tax charge if this extra amount is taken all at once and 25% if gradually withdrawn as taxable income.
- Open Market Option: This simply means that you are free to look at as many different companies to find the best value annuities as you wish.
- Pensions Day: This was the day when the new pensions changes were implemented. It occurred on 6 April 2006.
- Pension Income: The amount of money your pension provides you with. This cash can come from income drawdown, annuities or both options.
- Protection: Before the beginning of the 2006 tax year (April 6), you could protect your savings from the aforementioned lifetime allowance charge. Enhanced and primary protection were available and it needed to be implemented before the start of the 2009 tax year. If you paid any extra money into your pension after April 2006, you would automatically lose enhanced protection.
- Tax-Free Cash: Also known as the Pension commencement lump sum, this basically means you are allowed take up to 25% of your fund in tax-free cash though terms and conditions occur in some cases.
- Type A: This is the amount of growth your fund would have to achieve in order to match that gained by an annuity bought on the first day of your retirement. This figure makes the assumption that you purchased an annuity on your 75th birthday which gives you the same income.
- Type B: This is the amount of growth your fund will need to achieve in order to match a figure you specify. Again, this figure assumes you bought an annuity once you turned 75. If you take a higher income, your critical yield figure will also be high meaning that additional risks will need to be taken with your investment fund to keep up to speed.
- Triviality: You can withdraw your entire pension in a lump sum if it is 1% of the total lifetime allowance.