With effect from April 2015 the rules that apply to the way individuals access funds held in defined contribution pension schemes such as personal pensions will radically change.
The exact specifics will be determined in due course as the industry and Government begin a period of consultation over the coming months. The end result will be that there will be distinctly greater flexibility over how individuals, upon reaching the current minimum retirement age of 55, take their retirement benefits. Until then, a series of interim changes to both Capped and Flexible Drawdown have come into force and providers have already responded by, for example, reducing the minimum required for drawdown designation. In the first of two articles, we take a look at these interim rules and how they apply to Capped Drawdown.
First and foremost, with effect from 27th March 2014 the income limit for Capped Drawdown and dependant’s Capped Drawdown has increased from 120% to 150% of GAD (Government Actuary’s Department, which is broadly equivalent to an annuity). This equates to a not insubstantial 25% increase in the maximum income available. For existing Drawdown plans, this increase will apply from the next pension year commencing on or after 27th March 2014. Where this is also the plan review date, other factors such as investment performance and gilt rates since the last review will also affect the maximum income.
It’s not possible to get early access to the increase to 150% GAD by requesting an ad hoc review. Unfortunately legislation dictates that these are only permitted at the start of a pension year. As a consequence, some individuals will not be able to take advantage of the interim rules until March 2015, which is just before the formal changes as a result of the Budget’s proposals are expected to come into force.
Also, should an individual transfer an existing Capped Drawdown arrangement with income capped at 120% GAD, this will not reset their pension year. It remains fixed at the anniversary of the date they first designated funds for drawdown. Therefore, they’ll keep the 120% cap until the start of the next pension year after 27 March 2014.
Should an individual designate additional funds into an existing capped drawdown arrangement with a 120% GAD cap, maximum income would be recalculated immediately, however, it would remain capped at 120% GAD. The increase to 150% GAD in respect of the recalculated income is not available until the start of the next pension year after 27th March 2014. However, the 150% GAD limit will be available immediately where someone commences a new arrangement on or after 27th March 2014. Therefore, an individual designating additional funds into drawdown may wish to consider doing so via a new arrangement.
To clarify, these rules are the same as when the GAD limit returned to 120% for pension years starting from 26th March 2013, having previously being limited to 100% for pension years starting 6th April 2011 to 25th March 2013.
Examples
Emma is 61 and put her personal pension fund into drawdown (then known as Unsecured Pension) on 20th March 2011. Consequently her five year review is due on 20th March 2016. Presently her maximum income is 120% GAD. This will increase to 150% GAD with effect from 20th March 2015, which is the start of the next pension year after 27th March 2014. Emma could request a review earlier than 2016, but this would take place at the start of the next pension year. So she’d still only benefit from the increase to 150% GAD from 20th March 2015.
Bob is 61 and put his personal pension into drawdown on 15th May 2011, so his three year review is due on 15th May 2014. His maximum income has been 120% GAD since the start of the last pension year on 15th May 2013. He’ll benefit from the new 150% GAD limit from 15th May 2014, however, his maximum income will also be affected by the income recalculation due on this review date.