Benefit changes.

The previous forms of drawdown – Unsecured Pension (USP) and Alternatively Secured Pension (ASP) before and after 75 respectively – have now been merged into Capped Drawdown.

This form of drawdown will enable your clients to draw up to 100% of the equivalent annuity (based on the Government Actuary’s Department (GAD) rates, which have also been re-based to reflect current mortality assumptions) in each pension year.  The 100% limit must be reviewed at least triennially until age 75 and annually thereafter.

For those members already receiving a drawdown form of pension, their maximum limit will be recalculated to reflect the 100% limit and the revised GAD rates at the next scheduled review.  However, please be aware that certain actions, e.g. requesting an ad hoc review at the yearly anniversary or transferring a drawdown fund to another drawdown pension scheme, may trigger the new (lower) limits before the scheduled review date.

If your clients have partially vested benefits from the scheme and still hold uncrystallised funds, drawing a further tranche of benefit prior to the scheduled review date will not result in the new limit being triggered; the recalculation of the maximum drawdown will continue to be conducted on 120% GAD rate as opposed to the new 100% GAD rate.

However, where lump sum death benefits are paid from drawdown funds (or uncrystallised funds held after the age of 75) a 55% tax charge will be deducted at source.  No such tax charge applies where the funds are used to provide dependant’s pensions, which are subject to PAYE at the recipient’s marginal rate.

For those members in receipt of secure pension income that meets the Minimum Income Requirement (MIR), which is initially set at £20,000 pa, it’s possible to draw unlimited amounts of pension income from the fund.  This will be taxed under PAYE as earned income.  Your clients will receive additional tax charges if pension contributions are made within the same tax year that Flexible Drawdown starts or at any time thereafter.

Although most types of secure income e.g. lifetime annuities, state pension benefits etc count towards the MIR, it’s recently been confirmed that scheme pension income from small schemes has been excluded from the MIR.