Under a capped 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' is 150% of the Government Actuary's Department (or GAD as it's affectionately known) relevant annuity with no guarantee.
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 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 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.
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||
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 pension years. These form the first reference period:
|Period||Pension year||Review period||Maximum income|
|1 October 2014 to 30 September 2015||First||First||Calculated|
|1 October 2015 to 30 September 2016||Second||First||As previous pension year|
|1 October 2016 to 30 September 2017||Third||First||As previous pension year|
|1 October 2017 to 30 September 2018||Fourth||Second||Re-calculated|
|1 October 2018 to 30 September 2019||Fifth||Second||As previous pension year|
|1 October 2019 to 30 September 2020||Sixth||Second||As previous pension year|
As the member's pension fund had performed very well since the maximum amount was last calculated on 1 October 2017, they want to draw a higher income. Consequently, if on or before 30 September 2019 the member makes a request for a new reference date of 1 October 2019 and the scheme administrator agrees, the new reference period for the arrangement will look like this:
|Period||Pension year||Review Period||Maximum income|
|1 October 2019 to 30 September 2020||Sixth||Third||Re-calculated|
|1 October 2020 to 30 September 2021||Seventh||Third||As previous pension year|
|1 October 2021 to 30 September 2022||Eigth||Third||As previous pension year|
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 'double counting' against the lifetime allowance, the amount originally crystallised when the member went into drawdown is deducted. Only the balance (if any) 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 75 birthday.
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.
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.
The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.
All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.