By Nigel Bourke CFP, managing director of Stockton-based Mercury Wealth Management Ltd.

HOW do you like the idea of being able to draw all of the money from your pension fund at any time from the age of 55?

The good news is, that following changes to legislation effective from April 6 this year, you might be able to do exactly that – withdraw all of the money over time as an income, or as lump sums to suit your needs and, effectively, totally drain your pension fund.

Naturally, as you would expect, there is a catch.

This new Flexible Drawdown, as it is known, is only available to people who can effectively prove that they do not need the money in the first place. This requires you to prove that you have a secure income of at least £20,000 a year from other pension sources. This is known as the Minimum Income Requirement, the purpose of which is to ensure that, once people have fully exhausted their pension pot, they are not going to fall back on state benefits.

The Minimum Income Requirement can be met from a variety of pension sources, which include state pension, pension from an occupational scheme (if it has at least 20 members) and pension that you have secured by buying a level annuity, providing you with a guaranteed income for the rest of your life.

Strangely, the draft legislation presently excludes indexlinked annuities from the list of pensions, which count towards the Minimum Income Requirement, but it would seem this may be reviewed before the final rules have been approved.

Despite the obstacles which have been put in its way, the ability to drain the pension fund to suit your needs will present a very welcome opportunity for those who meet the Minimum Income Requirement because it should help to overcome the objections of those who feel that they will never see the full benefits of their pension funds, as they could ultimately be lost on death either to the Government in tax or to an annuity company.

It should be pointed out that money withdrawn from a pension fund and redirected, rather than spent, will form part of your estate and may be potentially liable to Inheritance Tax on death.

Where money is drawn simply to remove it from the pension plan, rather than because it is needed to cover expenditure, it will obviously be important to compare the potential tax liabilities if the money were to remain in the pension plan, or if it were to be taken out of it and forms part of the estate at the date of death.

Apart from meeting the Minimum Income Requirement, and being aged 55 or over, there are a number of other factors which need to be taken into account.

In order to take an income from a Flexible Drawdown Plan, it is a requirement that you do not make any contributions to any other pension plan, or have any paid on your behalf or be an active member of any pension scheme in the same tax year.

Owing to the complexities and administrative issues associated with this type of scheme, it is expected that not every pension provider will offer it.

Consequently, some people may need to transfer to another provider to take advantage of the new flexibility.

This will incur costs and charges for advice.

Under the proposed legislation, any part of a pension fund which is designated as Protected Rights, that is, which has resulted from contracting out of Serps, or the State Second Pension, cannot be brought into Flexible Drawdown.

It remains to be seen whether this will change from April next year, when protected rights will cease to exist as a pension fund category.

While your pension fund remains tax-free inside the plan, the proceeds, other than the initial tax free lump sum, are potentially taxable at your highest rate of income tax applicable in the year that you make any withdrawals.

It is not very many years since the only option available at retirement to individuals with defined contribution (money purchase) pension funds was to buy a Lifetime Annuity.

Now there is an extensive range of options from which to choose with varying degrees of complexity, which means that now, more than ever, it is essential to take professional independent financial advice at the point of retirement.

• Nigel Bourke CFP, is managing director of Stocktonbased Mercury Wealth Management Ltd. Call 01642-670307 or go to mercurywealth.co.uk