Standard Life ezine - The most efficient way to take a pension income? – Standard Life Pensions Ezine

Standard Life's Pensions newsletter for advisers

Issue 2: Nov 2006

Dripfeed Drawdown has been a feature of the Standard Life SIPP since it launched back in 2004, but how does Dripfeed work and what does it mean for your client?

Dripfeed Drawdown is an automated and tax efficient way of phasing income drawdown. It provides the customer with a targeted level of income, which is made up of both tax-free lump sum and income.

How does Dripfeed work?
The client chooses their required level of income and then each month, the system will automatically run a new Drawdown and GAD calculation.

Part of the pension is crystallised each month, with the proportion of tax-free lump sum and an amount of taxable income paid to the client to provide them with their targeted level of income. The proportion of tax-free lump sum and income will depend on whether the client wishes to maximise their death benefits or minimise the income tax that they pay.

For example; your client is looking to start taking an income of £12,000 per annum, then each month the system will automatically move enough money into post-pension to achieve a net income of £1,000 that month. The amount of money crystallised will depend on whether the client wants to take a higher proportion of their tax-free lump sum entitlement, or use up more of the available income from their post pension pot.

The decision on how much tax-free lump sum to use is mainly based on the factors below, because as well as providing a regular and flexible income, Dripfeed Drawdown also offers your client the opportunity to:

Minimise the income tax that they pay
It allows your client to reduce the amount of income tax payable on the pension income by taking a proportion of each payment from the tax-free lump sum entitlement. (Although obviously this does mean they lose the potential benefit of taking their tax-free cash entitlement in one lump sum)
Maximise death benefits
Using up the available income from the post pension pot means that more of the client’s money stays invested for longer in the pre pension date environment, where pension assets are not subject to 35% tax on death. (Please note this only applies where the client hasn’t nominated a dependant).

Dripfeed or Phased?
Dripfeed Drawdown is basically a variation on the traditional way of doing Phased Drawdown. For clients not looking to take their tax-free lump sum in one go, then it could be a more efficient way of taking a regular income from their pension.

As well as the tax efficiency, Dripfeed Drawdown also spreads the encashment risk to your clients’ fund. By crystallising smaller amounts on a regular basis, the risk of encashing a large sum when market values are depressed is reduced.

This could also result in the potential for greater growth. By reducing the encashment risk then this may provide the opportunity for the client to consider investing in assets which offer a higher potential for growth, but carry a higher degree of risk.

Dripfeed Drawdown will not be the right choice for everyone. The other main points worth noting about Dripfeed Drawdown are;

To use Dripfeed Drawdown, your client must remain fully invested in the Standard Life Investment Policy.
Only the necessary amount of money is moved into the post-pension environment at the point when income is taken.
The level of income can be changed easily to match the clients’ needs.
Your client can choose to take income on any day of the month (between the 1st and 28th).

For more information on Dripfeed Drawdown please contact your Standard Life office.

Any references to tax and legislation is based on Standard Life's understanding of law and HM Revenue & Customs practice at the date of publication. Tax and legislation are liable to change. Tax relief may be altered and the value to the investor depends on their financial circumstances.

No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of this content.