Taxbriefs Commentary Library

Capped drawdown - increase in the income limit

Ian Naismith, 01 Mar 2013


 

The Government has published its draft Finance Bill clauses on the changes to capped drawdown pensions, and provided more information on the transition arrangements.

The basic change is that the maximum pension is increased from 100% to 120% of the ‘basis amount’ for both capped drawdown and dependant’s capped drawdown. The basis amount is an annuity calculated using rates set by the Government Actuary’s Department (GAD), based on age and current interest rates. The change will take effect from 26 March, which is the date when the Budget debate is expected to end. It will be formally ratified when the Finance Act 2013 receives Royal Assent.

For individuals, the change will apply from the next anniversary of their most recent review of maximum income on or after 26 March.

Reviews must be carried out every three years, but if the most recent review was before 6 April 2011, the maximum period is five years. Clients can also ask for a review on any anniversary, subject to the scheme’s agreement.

If the maximum drawdown is currently 100% of GAD, that will continue to apply until the end of the current drawdown year, even if there is a further designation to provide additional drawdown or a transfer to a new arrangement. The maximum then increases to 120%, with no need for a recalculation of the maximum GAD rate unless a review is due then anyway.

There has been speculation that providers will struggle to cope with the change, because it is being introduced in a much shorter timescale than normal. Drawdown systems are often complex, reflecting the complexity of the rules, and even an apparently simple change requires significant programming and testing. It is possible that providers will manage to pay the higher maximum income, but they might take longer to change their illustration systems to cater for the new limits.

Clients may be affected by the changes in a number of different ways.

  • Some may already be on 120% of GAD under the transitional arrangements that were put in place when the limits were reduced in April 2011, and so will have no immediate change.
  • Others may be taking no income or much less than the maximum and will also be largely unaffected.
  • However, clients who are taking maximum income, perhaps as part of a phased drawdown strategy, may well want to increase it.

Advisers will also wish to review whether it would be beneficial to ask for a review of maximum income at the anniversary, rather than just increase current income by 20%. With relatively good recent investment returns, slowly increasing long-term interest rates and male GAD annuity rates now used for both men and women, there is a good prospect that the maximum income could increase.

Of course, drawing maximum income will probably mean that drawdown income will reduce over time, and clients must understand this. Those who meet the minimum income requirement of a guaranteed £20,000 a year may also want to consider whether flexible drawdown would meet their needs better.

This article appeared in the February edition of Financial Timesaver – the monthly digital newsletter for the busy financial adviser.

 


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Ian Naismith

Actuary & Author

Ian Naismith is an actuary with over 30 years' experience of working in pensions for a major life office.  He writes and presents extensively, including an annual report on pension provision in the UK based on a large  consumer survey.  He is a Governor of the Pensions Policy Institute.    

Ian is also co-author of Pensions and Retirement Planning 2012/13, part of Taxbriefs Adviser Guides Series.

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