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.
The maximum amount of income that can be taken in subsequent pension years will change.
The member can take any level of income they like from their fund up to this maximum limit.
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'.
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:
Let's look at each of the above now in turn.
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:
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.
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:
|When a lifetime annuity or scheme pension is purchased by part of the fund||
|The fund is reduced following a pension sharing event||
|Where additional fund designation occurs||
|Where there is full annuitisation and later designation of uncrystallised funds occurs under the arrangement||
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:
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:
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.
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.
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.
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.
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:
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
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.