Barnett WaddinghamIn our latest guest blog Andy Leggett from Barnett Waddingham looks at the recent changes to Income Drawdown and how they will affect you:

Higher Drawdown Rates from 26 March 2013

In April 2011, the maximum pension that a member could drawdown as income was reduced from 120% of the equivalent annuity rate (set by GAD – the Government Actuary’s Department) to 100% of this rate. In George Osborne’s Autumn Statement, the Chancellor responded to pension industry concerns about the effect of this lower rate coupled with low gilt yields by announcing plans to reinstate the 120% rate.

This reinstatement is planned to take place with effect from 26 March 2013 (but this could be subject to Parliamentary change). This leaflet looks at the implications, both pre and post 26 March 2013, for people about to start drawdown and people already in drawdown. There is also a section on other issues not directly related to drawdown pension.

Andy Leggett from Barnett Waddingham

Andy Leggett, Head of Business Development, Barnett Waddingham

Contact Andy on:

0844 443 0100

www.bwsipp.co.uk

The changes are linked to Pension Years. A Pension Year varies from individual to individual and starts on the date the member first crystallised benefits and ends one year from this date. Each subsequent Pension Year follows this date. For example, if benefits were crystallised on the 1 April 2011, the Pension Year will run from the 1 April to the 31 March each year.

Pre March 2013

Member draws benefits for the first time

The current 100% GAD rate will be used to calculate the member’s maximum pension. Unisex drawdown rates will also be applied if the calculation date is on or after 21 December 2012. For the next Pension Year, the maximum will automatically increase by 20% with no new pension review or fund valuation needing to take place.

Member draws further benefits (using phased drawdown)

The current 100% GAD rate will be used to calculate the member’s maximum pension. Unisex drawdown rates will also be applied if the calculation date is on or after 21st December 2012. For the next Pension Year, the maximum will automatically increase by 20% with no new pension review or fund valuation needed.

Member has a compulsory review due

A review will take place using updated fund value and applying the 100% GAD rate. Unisex drawdown rates will also be applied if the review date is on or after 21st December 2012. For the following Pension Year, the maximum will automatically increase by 20% with no new pension review or fund valuation needed.

Member has asked for a voluntary review with a pre 26 March calculation date

A review will take place using an updated fund value and applying the 100% GAD rate. Unisex drawdown rates will also be applied if the review date is on or after 21st December 2012. For the following Pension Year, the maximum will automatically increase by 20% with no new pension review or fund valuation needing to take place.

Member reaches age 75

Reaching age 75 does not alter the pension review date and so the 100% will continue to apply until the start of the next Pension Year which commences on or after 26 March 2013, at which point a compulsory review will be conducted and the 120% rate applied.

Member dies 

The usual death benefit options apply. If a drawdown fund is allocated to a dependant, their maximum will be worked out in accordance with the “drawing benefits for the first time” section above. We would suggest waiting until 26 March 2013 before allocating a drawdown fund to a dependant to make use of the 120% rate.

Post 26 March 2013

Member draws benefits for the first time

The 120% GAD rate will be used to calculate the member’s maximum pension using unisex drawdown rates.

Member draws further benefits (using phased drawdown)

This depends on how the additional drawdown funds are allocated. If they are kept separate from the existing drawdown fund, then the maximum is worked out for the additional funds only based on the 120% rate, and the funds already in drawdown continue as normal with the pre 26 March 2013 maximum until the next anniversary. This method might end up with a temporarily higher total maximum pension but suffers from additional administration from having two review dates – one for each drawdown fund.

If the additional funds are merged with the existing drawdown funds, then a review is immediately conducted on the combined drawdown fund at the 100% rate. If this results in a higher maximum than currently in force then that new maximum applies for the remainder of the current Pension Year, otherwise the in-force maximum continues (i.e. a review cannot result in a lower pension mid-year). At the end of the Pension Year, the new maximum is used but uprated by 20%.

Member has a compulsory review due

If the compulsory review is due between 26 March 2013 and 25 March 2014, then a review will take place using updated fund value and applying the 120% GAD rate. Otherwise, at the start of the next Pension Year, the maximum will automatically increase by 20% with no new pension review or fund valuation needing to take place but a full review using an updated fund and 120% GAD rate will be needed at the compulsory review date.

Member has asked for a voluntary review with a calculation date on or after 26 March 2013

This would trigger a new pension review and therefore require a fund valuation, but would allow the member to use unisex drawdown rates which are currently advantageous to women (as the more beneficial male rates are used).

Member reaches age 75

A compulsory review will be conducted at the start of your first Pension Year following your 75th birthday and the 120% rate applied. You can ask for your first review to use the fund value at age 75 for administrative convenience (this is because a fund check usually has to be carried out at age 75 anyway and so saves having to obtain an additional valuation that year). Requesting this option does not bring forward the transition onto the 120% rate.

Member dies

The usual death benefit options apply. If a drawdown fund is allocated to a dependant, their maximum will be worked out in accordance with the “drawing benefits for the first time” section above.

Other issues

Annuity Purchase with part of a drawdown fund

This will trigger an immediate review of the drawdown funds remaining in the pension (a fund valuation is required). The review will be calculated on the 100% rate and will only apply for the current Pension Year if there is an increase in the maximum. Otherwise, for the following Pension Year that new maximum will apply but with a 20% uplift. (Note that if the following Pension Year is a scheduled date for a compulsory review then a fresh calculation will be carried out, using the 120% rate). Annuity purchase does not alter the Pension Year dates.

Transfer of a drawdown fund

It is not possible to transfer out part of a drawdown fund, it must be a complete transfer.

On transfer, the receiving scheme will need to know the details of your existing maximum (review dates, Pension Year, current limits) from the transferring scheme and will mirror these. The rules above for application of the 120% rate will apply in the receiving scheme. In other words, a transfer out does not alter the maximum, the Pension Year or the transition onto the 120% rate.

Flexible Drawdown

Those in Flexible Drawdown are unaffected by these changes as there are no annual drawdown limits.

Scheme Pension

Those in Scheme Pension are unaffected by these changes as their pension is determined at outset and does not follow drawdown rules.

Dependant’s pensions in payment

Those in receipt of a dependant’s drawdown pension follow the above rules for moving on to the new 120% rate.

Sustainability

The change does not alter the fact that if income at or close to the uplifted maximum is drawn, there is an increased likelihood of erosion of the member’s funds, which could adversely affect future pension income.

Example

Susan had a pension review on 22 June 2011 and saw her maximum pension fall by 28% to £22,400. Her next compulsory review is not scheduled until 22 June 2014 when she will be 67. On 22 June 2013, her maximum will automatically be increased by 20% to £26,880. The scheduled maximum review date of 22 June 2014 is unchanged though and must be adhered to.

She could request a formal review on 22 June 2013 which would require a fund value at that point (or up to 60 days earlier) and a new calculation based on male drawdown rates. In her case, this results in a slightly higher pension of £27,220 with her next compulsory review due on 22 June 2016.

Next steps

If you would like to know more about how the changes to the Income Drawdown rules will affect you please do not hesitate to contact us, or the team of advisers at Investment Sense.

We can be contacted on 0844 443 0100 and you can speak with an Independent Financial Adviser at Investment Sense by calling 0115 933 8433 or by emailing info@investmentsense.co.uk

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