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Releasing tax free cash from pensions - Income Drawdown

Some clients aged over 55 may wish to draw their tax free cash sum from their pension plans - maybe for a one-off expense. However, they might not need any regular taxable income - they might still have employment income sufficient for day-to-day living, could be are taxpayers and do not want to pay tax on any pension income.

Pension plans generally provide the entitlement to a tax free cash sum of 25% of fund value when the benefits are drawn. Usually, if the tax free cash sum is drawn directly from the pension plan that the benefits are currently held under, you also need to start to receive a taxable annuity income from it.

As an alternative, in some circumstances I suggest that Income Drawdown be considered. The pension fund would be transferred to an Income Drawdown plan, before the tax free cash sum is paid out. Under an Income Drawdown contract it is possible to take the tax free cash from the pension fund and not draw income from the remainder of the fund until a later date.

However, Income Drawdown is not for everyone, as many people will prefer a guaranteed level of income provided by annuities and there is a need to review the investment funds regularly under Income Drawdown, but it may suit some of those who do need just their tax free cash sum now.

 

 

Date: 8th January, 2010
Author: Garry Picker

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