Retirement Income - Setting taxable income (from drawdown accounts)

When setting the desired level of taxable income to be taken via Flexi-Access Drawdown, there are a number of options available. This short guide is intended to clarify some of the options - if, by contrast, you are intending to model benefits in the form of 'Uncrystallised Funds Pension Lump Sum' withdrawals, you may find the following guides to be more immediately applicable:

Provide a long-term income (UFPLS) - combination of taxable income and tax-free cash. Read More >>

Take 100% of benefits as a 'lump sum' (UFPLS) at Retirement. Read More >>

Firstly, note that the Income from Drawdown Pension panel, shown below, can be reached via the Pensions > Money Purchase screen, under Withdrawals & Annuity. There is also a corresponding panel (identical in nearly all details), which can be reached via the Pensions > Drawdown Pension screen – under Drawdown & Annuity > Drawdown Strategy/Drawdown Pensions (USP).

The dialogue box (in either location) can used to set an initial level of (taxable) income, following the 'crystallisation' of some, or all benefits from a given money purchase account. Later, we will detail how to subsequently increase, or reduce/stop taxable income, as and when appropriate.

The income options are as follows:

  • None

One may (for example) choose to 'crystallise' the entire value within the money purchase account for the sole purpose of releasing the available tax-free cash lump sum. Where there is no (immediate) need for any taxable income, this setting may be appropriate.

  • As Needed

This is the software's current default setting. When using this option, be aware of the following:

  1. The software has a 'hard-coded' preference for cash assets and will, therefore, utilize available cash balances (in 'taxable' savings accounts) before any invested assets - either pension or investment accounts - will be drawn upon.
  2. By default - see Preferences > Liquidation Order - the software will utilise 'taxable' investment assets (e.g. 'unwrapped' investment accounts) before touching any available 'drawdown' funds. Of course, this default can be amended, as appropriate. 'Drawdown' assets are categorised as a 'tax deferred' asset.

Other things being equal, therefore, the software will seek to supplement income - in the first instance - with drawings from (1) 'taxable' cash/savings accounts, then (2) from 'taxable' investment assets. Where additional funds are still needed (to meet expenditure), the software will then utilise available 'tax-deferred' assets, which includes 'drawdown' funds.

  • % of Account Value

Note that - when using this setting - the software will withdraw the desired % based on the residual value of the account (at the end of the preceding year). As a result, one might expect to see either an increasing, or declining level of income, depending on the relative growth/income % settings.

  • Fixed w/ Inflation

A fixed monetary amount, increasing in line with one's assumed inflation setting.

  • Fixed w/o Inflation

A fixed monetary amount, with no indexation.

  • % of GAD Amount

While this no longer provides a constraint of any kind, one can still utilise this as an option: based on the 2011 GAD tables, the payment amount will take account of the client's age, and the assumed long-term gilt yield %. For individuals under age 75, the software will pay the calculated income for (up to) 3 years, before re-evaluating (i.e. a 'triennial review', for those under 75, is still applied).

  • Maximum

This setting entails the withdrawal of 100% of the account value, at the end of each year, i.e. no 'taxable' funds will accrue within the 'drawdown' account (for more than 12 months) when this setting is chosen.

How to subsequently increase/reduce/stop the level of taxable income:

Having set income from the 'drawdown' account at the desired initial level, it will sometimes be necessary to, subsequently, increase/reduce/stop taxable income, at some later date.

Because this relates to funds that will be held within a 'drawdown' account, it will be necessary (for the purpose of making any subsequent changes to the level of income) to make the relevant changes via the Pension > Drawdown Pension screen, i.e. follow the money.

NB: Having ascertained that you wish to increase/decrease the level of drawdown income, it will be necessary to add an 'event' to the Timeline, if you don't already have one, at the relevant point in time.

Having first selected the relevant account, in the Ledger, open Advanced Settings > Step-Up/Step-Down:

Last updated 11 November 2015, Release 4.0.28 



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