Many UK pensioners are wondering if capped
drawdown is the right way to go to make their pension savings more attractive
in the future. Well, there are pros and cons to every option but in the opinion
of financial planning experts, the scheme does create potential benefits if
used in the right way.
Capped drawdown was introduced by HM Treasury
as a replacement for the unsecured pension scheme more commonly known as income drawdown and Qrops. Under the capped
income drawdown plan, investors are free to leave their retirement fund
invested whilst drawing an income which is capped or limited to the maximum
equivalent of a single life level annuity.
Capped pension schemes also introduce some
changes to the death benefits of those who do not purchase an annuity. If an
annuity is purchased by the pensioner, the accumulated pension fund is
exchanged for the annuity. If a spouse’s
pension is not arranged at the time of the annuity purchase, then payments will
cease on the death of the annuitant and the unused pension funds are lost. Under a capped drawdown scheme, however,
there are a number of options available to the surviving dependants: capped
drawdown income can continue to the dependant, the remaining fund value can be
paid out as a lump sum or an annuity can be purchased.
The basics of capped pension drawdown plan
are relatively simple and easy to understand. Some areas of the rules can be
confusing and you may need the advice of a financial expert to fully understand
how it can affect your savings and income.
If you need cash from the pension, you can
use it just like an annuity to get tax free pension. However, rather than
taking a fixed income with the remaining funds as you do with an annuity, here
you are free to withdraw income from the plan subject to the cap.
Capped drawdown is in fact a means of
taking pension benefits without buying an annuity. One big advantage with this
scheme is that there is no upper age limit. For those under 75 years, the upper
income limit is reassessed every 12 months and the assessment is based on age
and fund size.
It is essential to keep yourself updated about the pension regulations. Pension schemes UK assures your peace of mind.
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