Capped income drawdown and review dates

Since 6 April 2015 any new income drawdown plans have been flexi-access drawdown plans. Although it is possible to transfer an existing capped drawdown plan to a new arrangement.

How is the maximum amount of income calculated?

Under a capped income drawdown plan, a tax-free cash lump sum usually of up to 25% of the fund is paid to the individual. The remainder of the pension pot can then be used to provide the individual with income. 

The maximum amount of income that can be taken during a 'pension year' is 150% of the Government Actuary's Department rate (or GAD as it's affectionately known) relevant annuity with no guarantee.

The individual can take any level of income they like from their fund up to this maximum limit. If they take more than the maximum income, the plan will covert to a flexi-access drawdown plan and the money purchase annual allowance will apply to any future contributions.

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 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 individuals under age 75 this is done on the following basis:

• At least every three years.  

or

• As a result of certain events.
• When the individual requests an additional review.

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

Three-year reviews (under age 75)

As a minimum, a review must 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 plan is converted to a flexi-access drawdown plan.
• The individual dies.

At the review date the new maximum income is calculated in the same way as the initial maximum with reference to the GAD tables, value of the income drawdown fund and individual'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 amount of income has been taken, the maximum level of income may 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.

HMRC Pensions Tax Manual - PTM062560: review triggered by specific events

Individual requests an additional review

Of course, individuals 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 pension years. In this example the capped drawdown plan started on 1 October 2012. The next review period then starts on the 1 October 2015:

Example

The individual was reviewing their income requirements before 1 October 2020. The fund had performed very well since the maximum amount was calculated on 1 October 2018, so they asked the provider to perform an additional review. If the scheme administrator agreed, the new reference period for the arrangement will look like this:

What happens at age 75?

HMRC Pensions tax manual - PTM062540 - Member benefits: pensions: drawdown pension rules immediately before 6 April 2015: capped drawdown pension - reviewing the maximum annual amount before age 75 

The review dates 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 individual's 75 birthday.

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

Yes, it is. However, the existing pre-April 2015 rules still apply where the capped drawdown plan can only be transferred to an empty arrangement containing no other sums or assets.

There is more information in HMRC's Pensions Tax Manual - Transfers in drawdown.

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. Individuals also need to be aware that certain actions, for example, designating additional funds will trigger a review.