Men considering flexible pension drawdown next tax year should act now

Any men considering entering flexible pension drawdown next tax year should look at taking action now according to Skandia, part of Old Mutual Wealth.

Taking action now could mean men use less capital buying the annuity they may need to qualify for flexible drawdown.

To qualify for flexible drawdown, people need to be receiving guaranteed annual pension income of £20,000. Part of this income can be made up from the state pension, including the state second pension, which for next tax year increases by 2.5%. The remainder is usually made up of scheme pensions from defined benefit occupational scheme membership, and/or lifetime annuities from money purchase pension savings.

Where a combination of state pension and other existing pension income falls short of the £20,000 required, a client will need to use part of any money purchase savings to buy a lifetime annuity to make up that shortfall. Taking action to buy the annuity now could be more beneficial for the following reasons:

1. Better annuity rates:

Currently, annuity rates are higher for men than for women. When gender equality legislation comes into force from 21 December this year, it will mean a uniform annuity rate for both men and women. It is predicted that this could result in lower annuity income being available to men.  Annuity rates could also be adversely impacted by the Solvency II regulations, which will require life companies to focus more of their resources on capital reserves.

2. Flexibility in they type of annuity required:

The type of annuity purchased can make a big difference to the level of income received.  Higher annuity rates are generally available where the annuity is payable ‘annually in arrears', which means an annuity purchased today doesn't pay the first annual income until one year later. This is perfect for those wanting flexible drawdown next tax year, as any annuity purchased annually in arrears today will provide the income in the next tax year when needed to meet the requirement for flexible drawdown for that tax year.

So acting now means men could benefit two fold - firstly they could benefit from higher male rates generally while they last, and secondly benefit from the type of annuity they are able to purchase to meet the eligibility requirements.  This means they could use less of their pension capital to purchase the required income annuity for flexible drawdown (assuming Gilt rates stay the same), leaving more of those savings for future retirement income planning.

Adrian Walker, Skandia's pension expert, comments:

"Flexible drawdown gives people access to their money purchase pension savings without restriction, allowing them to take a more flexible approach to retirement income planning across all of their savings. It can be an extremely attractive option, which people should consider utilising if they have the opportunity.

"Any males considering flexible drawdown next tax year should consider securing any shortfall in their £20,000 income requirement in the next few weeks for maximum benefit. If they wait until after the 21st December 2012 to secure that income, the annuity rates will be gender neutral, and are likely to use up more of their available money purchase pension savings to achieve eligibility."