Income drawdown and review dates

Income drawdown involves taking a pension directly from a fund instead of buying an annuity. There is, however, a limit on the maximum amount of income that can be withdrawn during a year and this limit is reviewed on a frequent basis.
Key points
  • The increased GAD factor of 150% automatically applies to pension years starting on or after 27 March 2014. This means that any new plans set up from 27 March 2014 will be on the 150% basis.
  • For plans set up between 26 March 2013 and 26 March 2014 the maximum is 120% of GAD. This will increase to 150% at the start of the next pension year on or after 27 March 2014.
  • Unauthorised member payments apply if income exceeds maximum amount.
  • Reviews have to take place at least every three years.
  • Reviews can be triggered by certain events or can be requested by the member.
  • In most cases, the maximum income that can be taken from a drawdown plan will change at each review.
  • Transfer from an existing drawdown plan to a new drawdown plan is allowed.

How is the maximum amount of income calculated?

Under an income drawdown contract, a tax-free cash sum of up to 25% of the fund is paid to the member. The remainder of the pension pot can then be used to provide the member with income.

The maximum amount of income that can be taken during a 'pension year' depends on the date the drawdown plan was effected.

  • For drawdown plans effected on or after 27 March 2014, the maximum amount of income that can be taken during a 'pension year' is 150% of the Government Actuary's Department (or GAD as it's affectionately known) relevant annuity with no guarantee.
  • For drawdown plans effected between 26 March 2013 and 26 March 2014, at the start of the plan the maximum amount of income that could be taken was 120% of GAD.
  • For drawdown plans effected between 6 April 2011 and 25 March 2013, at the start of the plan the maximum amount of income that could have been taken was 100% of GAD.
  • For drawdown plans effected before 6 April 2011, at the start of the plan the maximum amount of income that could have been taken was 120% of GAD.

The maximum amount of income that can be taken in subsequent pension years will change.

  • For drawdown plans effected before 6 April 2011, if they had a compulsory review between 6 April 2011 and 25 March 2013 the maximum amount of income that could have been taken would have reduced from 120% of GAD to 100% of GAD.
  • For the pension year starting on or after 26 March 2013 the maximum income that could have been taken was 120% of GAD.
  • For the pension year starting on or after 27 March 2014 the maximum income that can be taken is 150% of GAD.

The member can take any level of income they like from their fund up to this maximum limit.

What's a 'pension year'?

The maximum amount of income allowed applies for a 12 month period immediately after first taking income and any subsequent 12 month period. These 12 month periods are known as 'pension years'.

Reviews

To make sure that the income drawdown fund continues to provide an income and isn't used up too quickly, the maximum income that can be taken is reviewed. For members under age 75 this is done on the following basis:

  • at least every three years for new plans or every five years for plans set up before 6 April 2011 (until their first review date after 6 April 2011 when they will move to three year reviews),

or

  • as a result of certain events,
  • when the member requests an additional review.

Let's look at each of the above now in turn.

Three year reviews

As a minimum, a review now has to take place at least every three years. Each three year period is known as the 'reference period'. The point at which a review is carried out is called the 'reference date'.

The first reference date is on the first day of the fourth pension year following the designation of income drawdown, then again on the first day of the seventh year and so on. This continues until one of the following events occur:

  • the entire pension fund is used to buy a lifetime annuity,
  • the member dies.

At the review date the new maximum income is calculated in exactly the same way as the initial maximum with reference to the GAD tables, value of the income drawdown fund and member's age. The new limit for the next three years is then set at 150% of the revised amount.

The maximum amount of income normally changes following a review. By how much depends on the investment performance of the fund, the amount of income taken during the reference period and the GAD interest rate at the time of review. If the fund has benefited from strong investment growth and a low income has been taken, the maximum level of income will undoubtedly rise. Conversely, if fund performance has been poor and maximum income has been taken, the new limit is likely to be lower than before. Also, the higher the GAD interest rate the higher the relevant annuity on which the GAD limit is based.

Additional reviews

In addition to the basic requirement of a review taking place every three years, certain events trigger an additional review. These reviews don't alter the existing pension year or reference period structure, or indeed the timing of the next three yearly review:

Event 
When a lifetime annuity or scheme pension is purchased by part of the fund
  • the scheme administrator must re-calculate the maximum amount on the day the annuity is purchased.
  • the calculation is based on the fund value immediately after the purchase and the member's age on that day.
  • new limit doesn't apply to the pension year that the lifetime annuity or scheme pension is purchased, it applies from the start of the next pension year.
The fund is reduced following a pension sharing event
  • calculation takes into account the reduction in the fund caused by the pension sharing order.
  • new limit doesn't apply to the pension year that the pension sharing order comes into effect, it applies from the start of the next pension year.
Where additional fund designation occurs
  • the calculation of the new maximum income must take place on the same day as the additional fund designation occurs.
  • the new income limit takes effect immediately and alters the existing limits for the current pension year.
  • a review is still needed where additional fund designation occurs in the last year in a three year reference period.
  • where additional fund designation occurs towards the end of a three year reference period, the value of the fund may have decreased to such an extent that even with the additional funds, the overall value of the fund has decreased.
Where there is full annuitisation and later designation of uncrystallised funds occurs under the arrangement
  • if the member uses all the fund to purchase a lifetime annuity contract or a scheme pension then no income drawdown can be paid, either in the current or later pension years.
  • if further money from the pension fund is moved into the income drawdown fund in the same pension year, the same reference period is used as before.

Member requests an additional review

Of course, members don't have to wait three years or for one of the above events to occur. They can request additional reviews but the final decision as to whether to grant one or not lies with the scheme administrator. The new limits apply from the start of the next pension year and can't start immediately.

Let's take a typical example by looking at a scheme's first three pension years. These form the first reference period:

  • 1 October 2012 to 30 September 2013 (the first pension year)
  • 1 October 2013 to 30 September 2014 (the second pension year)
  • 1 October 2014 to 30 September 2015 (the third pension year)

As the member's pension fund has performed very well since the maximum amount was first calculated on 1 October 2012, they'd now like to draw a higher income. Consequently, if on or before 30 September 2014 the member makes a request for a new reference date of 1 October 2014 and the scheme administrator agrees, the new reference period for the arrangement will look like this:

  • 1 October 2014 to 30 September 2015 (the first in this new reference period but the third overall pension year)
  • 1 October 2015 to 30 September 2016 (the second in this new reference period)
  • 1 October 2016 to 30 September 2017 (the third in this new reference period)

If a member who is currently on the 120% basis requests an additional review on or after 27 March 2014, the scheme administrator will calculate the income using the 150% basis. However, the new maximum income amount will not take effect until the next pension year.

So what does the increase to 150% of GAD on 27 March 2014 mean for new and existing members?

The increased GAD factor of 150% applies to pension years starting on or after 27 March 2014. This means that any new plans set up from 27 March 2014 will be on the 150% basis for three years.

Plans set up prior to 6 April 2011 will be on the 120% basis and will have a five year reference period. These plans will move to the 150% basis from the next pension year on or after 27 March 2014 and to three year reviews from their next compulsory review date.

If a plan set up prior to 6 April 2011 had a compulsory review before 26 March 2013 they will be on the 100% basis for three years and the following paragraph will apply to them.

For plans set up between 6 April 2011 and 25 March 2013 (on 100% basis), at the start of the first pension year on or after 26 March 2013, the maximum income available will have increased by 20% e.g. for a member with maximum income of £10k on the current 100% basis, the maximum income amount available will have increased to £12k. It was not necessary for the member to request an additional review to move to the 120% maximum and therefore the original three year reference period will be unaffected. For the pension year starting on or after 27 March 2014 the maximum income available will be calculated using 150% of GAD.

Pension years cannot be brought forward. Therefore, the 150% basis cannot be brought forward by doing an additional fund designation or doing a transfer in drawdown (TID). The increase to the 150% basis still only applies from the first pension year after 27 March 2014. So, for example, a drawdown plan with a pension year that started on 10 March 2014 will not be able to move to the 150% basis until 10 March 2015.

What happens at age 75?

Reaching age 75 is a benefit crystallisation event (BCE) and so the drawdown fund will be tested against the lifetime allowance. Obviously, going into drawdown in the first place was also a BCE so, to avoid a 'double counting' against the lifetime allowance, the amount originally crystallised when the member went into drawdown is deducted. Only the balance (if any) therefore counts as an additional BCE amount.

The review dates also change - the maximum drawdown pension will now need to be recalculated at the start of every pension year. The switch over to yearly reviews will happen at the end of the pension year following the member's 75th birthday.

Is it possible to transfer an existing drawdown plan to a new drawdown plan?

Yes it is. However, what happens with a transfer in drawdown (TID) will depend on the GAD basis the member is on with current provider.

If the member is currently on the 120% basis, a TID will come across and continue on the 120% basis until the start of next pension year, at which point the existing maximum income amount will automatically increase to the 150% basis.

Before 7 March 2013 if the ceding drawdown plan was on the 120% basis (i.e. the current reference period started prior to 6 April 2011), a TID would spark a full GAD review at the start of the next pension year. On or after 7 March 2013 a review was not triggered if the next pension year started after 25 March 2013, regardless of whether the TID itself happened before or after that date. However, although there is now no formal GAD review until the next review date, for pension years starting on or after 27 March 2014 the increased GAD factor of 150% will apply.

There is more information in HMRC's Registered Pension Scheme Manual - Transfers in drawdown.

What if the limits are breached?

Well, bad things happen. An unauthorised member payment is levied if the amount of income paid in a pension year exceeds the maximum allowed. The member is charged 40% on the excess amount. Furthermore, these additional charges may also apply:

  • a scheme sanction charge, and
  • an unauthorised payments surcharge.

Summary

In most situations the maximum income that can be taken from a drawdown plan will change at each review, depending on investment performance,the amount of income taken and the prevailing GAD interest rate. Members also need to be aware that certain actions e.g. designating additional funds, will trigger a review.

Published 26 February 2008

Updated 26 March 2014

Notes

The information provided is based on our current understanding of the relevant legislation and regulations and the Budget 2014 and may be subject to alteration as a result of changes in legislation or practice.

Any research and analysis has been provided by us for our own purposes and the results of it are being made available only incidentally.

Last updated: 06 Nov 2014

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