For many retirees the annuity option is always first choice when it comes to selecting retirement income options
. There is though a valuable alternative to annuities, income drawdown has always been considered too expensive and risky for many retirees. This week though the Treasury announced two new retirement schemes that could be an option for many retirees.
Capped Drawdown will replace the current income drawdown products. Income drawdown or unsecured pension as it is officially badged allows retirees to keep their pension fund invested and defer annuity purchase until age 77. This new capped drawdown scheme change radically the current income drawdown rules. Scrapped is the requirement to annuitise at age 77, instead there is no requirement to annuitise at all. Current rules regarding income withdrawal have also been changed and now the maximum income will be 100 percent of the standard single life, level annuity equivalent in place of the 120 percent that currently applies.
Under rules announced by the Treasury on 9 December, pensioners will be able to use income drawdown indefinitely as the requirement to annuitise by age 77 will be removed from 6April 2011. Pensioners using capped drawdown will be able to take a maximum income of 100% of the equivalent annuity rate, and this income amount will be reviewed every three years before age 75 and annually thereafter.
Flexible Drawdown is a new retirement scheme that will allow unlimited income withdrawals from the invested fund proving the retiree can prove a minimum income requirement (MIR). This requirement will be introduced from 6 April 2011 and initially the MIR has been set at 20,000 GBP. Sources of income which count towards the new flexible drawdown include guaranteed lifetime income are state pensions, defined benefit schemes, scheme pensions and lifetime annuities. Purchased life annuities which are annuities bought with cash rather than pension funds will not count towards the minimum income requirement.
Income drawdown plans are complicated and before making any decisions retirees would be wise to seek independent financial advice.