Until now, if you were coming up to 75, and had a defined contribution pension, then you would have been expected to secure an income, usually by purchasing an annuity by the age of 75. From 6th April 2011, pensioners will no longer have to purchase their income, but will be able to draw their income directly from pension savings for as long as they choose.
This is known as Income Drawdown, and according to the government documents accompanying the change, it provides ‘greater flexibility for individuals over how and when they can access pension savings in retirement.
The move affects those who are investing in defined contribution plans. The amount paid out by these schemes at retirement is entirely dependent upon the contributions made across working life and the success of the pension’s investment vehicles.
Therefore these changes are likely to mainly affect those who have saved more than average and in particular, those who have a pension of £20,000 plus each year with the ability to live off their pension savings for an indeterminate amount of time. These people will have extended flexibility to drawdown from their pension pot as they see fit, providing they can prove they have a secured income.
From this viewpoint the increased flexibility can also be seen as an attempt on the government’s part to encourage more responsible saving behaviour by offering further incentives. Anything that simplifies pensions and creates added flexibility for a period of life where anything can happen has to be welcomed, but it’ll be interesting to see how smoothly these measures come into play on 6th April 2011.