FLEXIBLE DRAWDOWN UNDER THE COLLECTIVE RETIREMENT ACCOUNT

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1 FLEXIBLE DRAWDOWN UNDER THE COLLECTIVE RETIREMENT ACCOUNT FOR FINANCIAL ADVISERS ONLY Q1. Can flexible drawdown apply to all Collective Retirement Accounts (CRAs) or only those effective from the introduction of the new rules? Q2. Can advisers submit applications for flexible drawdown or flexible drawdown transfers online? Q3. Will clients with uncrystallised funds in a CRA have to move into capped or flexible drawdown by age 75? CONTRIBUTIONS Q4. Can clients continue to contribute to a CRA if they are in flexible drawdown? Q5. My client needs to purchase a lifetime annuity with part of the funds in a CRA to become eligible for Flexible Drawdown can this be done? Q6. Can clients add further funds to a CRA that is in flexible drawdown? APPLYING FOR FLEXIBLE DRAWDOWN Q7. A client who wishes to use flexible drawdown has made a contribution to the CRA in this tax year, when can they apply for flexible drawdown? Q8. Will all clients be able to have flexible drawdown under CRA? Q9. Do we have a document that shows how Old Mutual Wealth will process flexible drawdown within a CRA? Q10. If a client has an existing CRA, or transfers pension funds into a CRA and applies for flexible drawdown, what is the minimum fund that can be moved into flexible drawdown for that CRA? ANNUAL REVIEWS Q11. Is there any annual review under flexible drawdown for a client and/or adviser?

2 FLEXIBLE DRAWDOWN INCOME Q12. Is it difficult to calculate how much of a client s CRA fund is needed to provide a target flexible income requirement or a client who is phasing in flexible drawdown? Q13. Will the income payment dates for flexible income be any different to that for capped drawdown? Q14. A client has applied for flexible drawdown on a CRA that holds both crystallised and uncrystallised funds. What options are available to the client in deciding from which part future income payments should be paid? Q15. Is there any need to have a Benefit Crystallisation Event (BCE) test when a client moves into flexible drawdown? FLEXIBLE DRAWDOWN DEATH BENEFITS Q16. What is the tax treatment of funds held in a CRA which is in flexible drawdown when a client dies? Q17. If a client with a CRA in flexible drawdown dies, can we provide a dependant s flexible drawdown for his surviving spouse/dependants? Q18. Why would clients eligible for flexible drawdown only crystallise part of their money initially for this facility? TRANSFERS Q19. Can a client move back from flexible drawdown to capped drawdown? Q20. Can a client transfer a flexible drawdown arrangement to another registered pension scheme? Q21. Can a client buy a Lifetime Annuity from a flexible drawdown fund?

3 Q1. Can flexible drawdown apply to all Collective Retirement Accounts (CRAs) or only those effective from the introduction of the new rules? Flexible Drawdown is an option that is available to all clients with CRAs (subject to eligibility conditions set out in Q8). Q2. Can advisers submit applications for flexible drawdown or flexible drawdown transfers online? Applications for a new flexible drawdown arrangement No. This will be an option that a client can apply for after a CRA has been set up. Applications for a client transferring a flexible drawdown arrangement held with another provider No. It will need to be submitted online as a capped drawdown arrangement. Whilst a pre-sale flexible drawdown illustration can be provided in these cases Old Mutual Wealth will still need to accept the flexible drawdown application form which the client completes. This is not part of the online application process and is the reason why the application has to be initially submitted as a capped drawdown arrangement. Q3. Will clients with uncrystallised funds in a CRA have to move into capped or flexible drawdown by age 75? No, provided clients have a CRA before their 75th birthday, their funds can remain uncrystallised until they move part or all their funds into capped or flexible drawdown. They will be able to do this at any age beyond age 75. Q4. Can clients continue to contribute to a CRA if they are in flexible drawdown? We will not prevent a client from continuing to contribute to a CRA because they are in flexible drawdown. However, they will be subject to an annual allowance charge on the contribution, which they will be responsible for. The tax rules prevent a refund of contributions in this circumstance. Once in flexible drawdown this rule also applies in respect of any other registered pension schemes of which the client is a member. Q5. My client needs to purchase a lifetime annuity with part of the funds in a CRA to become eligible for Flexible Drawdown. Can this be done? Yes, subject to minimum fund size criteria the CRA offers the facility for clients to use a partial open market option to secure the additional lifetime annuity needed to meet the Minimum Income Requirements for Flexible Drawdown. The partial open market option is only available from crystallised funds within a client s CRA which in some cases will require the client to crystallise part of their CRA fund initially to secure the partial open market option. Once payment of the annuity income from the partial open market option has started the client can then complete the Flexible Drawdown declaration to have the remainder of their CRA funds treated under Flexible Drawdown rules. For more details of how the partial open market option facility works please read Use of the partial open market option through the Old Mutual Wealth Collective Retirement Account.

4 Q6. Can clients add further funds to a CRA that is in flexible drawdown? Yes but the transferred funds will be applied subject to the notes below that relate to a client s specific circumstances. Transfer of uncrystallised funds to a flexible drawdown arrangement set up from a post 5 April 2006 income withdrawal arrangement Old Mutual Wealth can accept a transfer in of uncrystallised funds to the same CRA up to five days before the client s 75th birthday. The client can then elect to move those funds into flexible drawdown immediately, or at some time in the future. Transfer of uncrystallised funds to a flexible drawdown facility set up from a capped drawdown fund that was originally set up before 6 April 2006 A client will not be able to top up the same CRA with a transfer of uncrystallised funds. They will have to set up a separate CRA to accept those transfer monies, which must be received by no later than five working days before the client s 75th birthday. They can then apply for the flexible drawdown to apply to that separate CRA when they wish to draw on those funds using a separate flexible drawdown declaration form. Transfer in existing capped drawdown or flexible drawdown funds from another registered pension scheme to use flexible drawdown This transfer will have to be applied to a separate CRA. HMRC rules do not allow existing drawdown funds to be added into an arrangement which already holds money. The client can then make a separate flexible drawdown declaration, enabling the funds from this transfer to move into flexible drawdown when they require. A separate income charge will be applied to that account when flexible drawdown starts to apply. Q7. A client who wishes to use flexible drawdown has made a contribution to a registered pension scheme in this tax year. When can they apply for flexible drawdown? As a client has made a contribution to a registered pension scheme in this tax year, they cannot start flexible drawdown in this tax year. They can, therefore, only make an application for flexible drawdown by completing a flexible drawdown declaration on or after 6 April 2014, i.e. the start of the next tax year. This rule applies whether the contribution the client makes is to a CRA or any other Money Purchase registered pension scheme in the tax year. At the time the application for flexible drawdown is made, the client must not be an active member of a Defined Benefit (final salary) scheme.

5 Q8. Will all clients be able to have flexible drawdown under CRA? No, there are two specific requirements that will limit the number of clients with CRAs who can apply for flexible drawdown. 1. Legislation dictates that clients must already be receiving 20,000 from secured pension income from sources other than the CRA. This is known as the minimum income requirement (MIR). Clients must sign a flexible drawdown declaration to confirm they are in receipt of such income before Old Mutual Wealth can accept a flexible drawdown application. Although the legislation allows overseas income to be included as Relevant pension income Old Mutual Wealth will not accept a flexible drawdown declaration that depends upon overseas pension income to meet the 20,000 minimum pension income requirement This is the reason why, for flexible drawdown transfers, Old Mutual Wealth requires its own declaration to be completed by the client to ensure that the MIR is met by income other than overseas pension income. 2. Old Mutual Wealth has set a minimum financial value that a client must hold within their CRA(s) to be eligible. On the date Old Mutual Wealth accepts the flexible drawdown declaration a client must have a minimum value of 37,500 after any tax-free cash entitlement within their CRA. Where the client has multiple CRAs, one account must meet the above minimum account value. Once a flexible drawdown declaration has been accepted for named accounts, there is no need to make a further declaration in respect of those accounts in the future. The minimum amount within a CRA that will need to move into drawdown as part of the flexible drawdown rules is 1,000 of the current total fund. Q9. Do we have a document that shows how Old Mutual Wealth will process flexible drawdown within a CRA? Yes, as there are a number of different ways in which clients who are eligible for flexible drawdown can move funds within a CRA to achieve their aims, the processes used and the documentation clients will receive will differ. A document that sets out the application requirements and the documentation clients will receive through the initial flexible drawdown process can be found on the literature library. For clients crystallising monies into flexible drawdown for the first time, the drawdown element of the fund will initially move into capped drawdown, before moving to flexible drawdown to make the income payments required. As a result the client will initially receive a Benefit Crystalisation Statement and capped drawdown illustration showing no income being taken. Once a client has received a confirmation letter accepting their flexible drawdown application, they will receivean illustration showing the effect of the flexible income being taken. For clients transferring a flexible drawdown arrangement, the drawdown element of the fund will initially be processed under capped drawdown rules before flexible drawdown is applied. Q10. If a client has an existing CRA or transfers pension funds into a CRA and applies for flexible drawdown, what is the minimum fund that can be moved into flexible drawdown for that CRA? For uncrystallised funds in a CRA the minimum fund that can move into flexible drawdown will be 1,000. Once established, the client will be free to move further uncrystallised funds into flexible drawdown subject to the same minimum. However, we would usually expect a client to move larger sums to meet their target annual income needs. If the CRA is fully in capped drawdown, all the capped drawdown fund must move into flexible drawdown at the application stage.

6 Q11. Is there any annual review under flexible drawdown for a client and/or adviser? Not in the same way as for capped drawdown. There are no statutory reviews as clients are free to instruct us to pay whatever income they wish from their flexible drawdown fund. However, advisers will want to regularly review a clients on-going income requirements along with other assets a client holds to provide tax efficient income solutions. If their current flexible drawdown is insufficient to meet their additional income needs, clients can crystallise further uncrystallised funds into their flexible drawdown fund. To do this they must complete a BCE drawdown form and provide an instruction stating the income payment they require. They do not need to complete a new flexible drawdown declaration. Q12. Is it difficult to calculate how much of a client s CRA fund is needed to provide a target flexible income requirement for a client who is phasing in flexible drawdown? No, the calculation is very simple unlike that for phasing into capped drawdown, as there are no GAD tables or gilt yields to take into account. For every 1,000 of uncrystallised fund used the net income provided will be: For basic rate taxpayer 850 For 40% taxpayer 700 For 45% taxpayer (These figures assume 25% tax-free cash is taken.) So, for a client who is a basic rate tax payer and wants an initial flexible income payment of 10,000 net of basic rate tax, the amount crystallised would be: 10,000/ 850 x 1,000 = 11, This would provide a tax-free element from the pension commencement lump sum of 2, (ie 25% of fund crystallised rounded down) and a net income of 7, from the remaining 8, The above process can be used for all such calculations. Q13. Will the income payment dates for flexible income be any different to those for capped drawdown? No, income payments for flexible drawdown will be dealt with identically to those for capped drawdown. Income payments will be made on 25th of the month, or the last working day before 25th of the month. Income will only be paid if income instructions have been received by the end of the previous month as currently applies for capped drawdown.

7 Q14. A client has applied for flexible drawdown on a CRA that holds both crystallised and uncrystallised funds. What options are available to the client in deciding from which part future income payments should be paid? There are two choices available to the client: Option 1 take from crystallised element of CRA. Subject to there being sufficient funds held in this element the client could instruct ongoing income to be taken from these funds. As income tax would be deducted from the whole payment, more of the capital in the CRA would be used up than if using uncrystallised funds. However, such action would, for clients aged under 75, improve the overall death benefit position. This is because keeping as much of the remaining CRA fund as possible uncrystallised will reduce the potential tax charge on any lump sum death benefit paid. There will be no BCE form to complete if this option is selected. Option 2 take from uncrystallised element of CRA. This option, for a client aged under 75, would use up less of the client s overall fund as part of the income payment. Any pension commencement lump sum used as part of the process would be tax free. However, from a death benefit perspective it would leave the fund with a higher potential tax liability for any lump sum death benefit payments. This is because of the 55% tax charge that would apply on the drawdown fund within the CRA. The client would need to complete a BCE form if using this alternative. Q15. Is there any need to have a BCE test when a client moves into flexible drawdown? This depends on the type of fund being moved into flexible drawdown. Where uncrystallised funds are moving to flexible drawdown the client will need to complete a BCE event form stipulating the amount of Lifetime Allowance already used (provided this event happens before the client s 75th birthday). Where the funds are already crystallised and the client has either not reached 75 or is over 75, there will be no BCE test requirements for this event. Age 75 is a critical point for these requirements. Clients are required under HMRC legislation to have any benefits tested at age 75 if they are: uncrystallised or were crystallised into capped or flexible drawdown on or after 6 April 2006.

8 Q16. What is the tax treatment of funds held in a CRA which is in flexible drawdown when a client dies? Value paid as lump sum Any funds in the CRA that are held in drawdown and are paid out as a lump sum will be subject to a 55% tax charge regardless of the age of the client at the time of death. If the client is aged under 75 at death, any uncrystallised funds held in the CRA can be paid out as a lump sum without tax charge, provided the value is within the client s remaining Lifetime Allowance. If the client is aged over 75 at the time of death any uncrystallised funds within the CRA would also be subject to a 55% tax charge. Value used to provide spouse/dependants income Before they die, the CRA member can nominate that on their death the remaining capital value of the crystallised part of the account (ie the part that is in flexible drawdown) can be passed to a surviving spouse or financial dependants to provide them with an income option instead of a lump sum in which case no tax charge will apply. The income options include purchase of an annuity or movement to income withdrawal. The CRA offers a spouse/dependant s income withdrawal facility. Q17. If a client with a CRA in flexible drawdown dies, can we provide a dependant s flexible drawdown for his surviving spouse/dependants? Where a client dies in flexible drawdown and the surviving spouse or financial dependant requires the income option, they will initially move into capped drawdown. This is because, they themselves must be eligible under the minimum income requirements to apply for flexible drawdown. If they are eligible, we will offer the spouse or financial dependant a flexible drawdown facility. This will not be subject to any minimum fund test, as we deem that this benefit is part of the original financial underwriting applied to the deceased member. If the surviving spouse/dependant has their own CRA and wants flexible drawdown applied to that separate fund, their own CRA fund must meet the minimum overall fund requirements before they can have flexible drawdown through their own CRA. Q18. Why would clients eligible for flexible drawdown only crystallise part of their money initially for this facility? When clients move all their funds into flexible drawdown after taking any tax-free cash, the balance of their fund in drawdown will, on death, be subject to a 55% tax charge. Clients may wish to secure eligibility to use their funds for flexible drawdown in future based on the current minimum income requirements, but wish to keep most of their funds uncrystallised for later use. By doing so they will ensure that, should they die before age 75, they will minimise the amount of any lump sum death benefit tax charge due.

9 Q19. Can a client move back from flexible drawdown to capped drawdown? There is no reason under legislation to do so. Flexible drawdown allows clients to impose their own income threshold as their ongoing needs change. They can stop taking income at any time, the same as under capped drawdown, and will not be subject to the maximum annual income thresholds that apply for capped drawdown clients. Most clients using flexible drawdown who have uncrystallised funds in their CRA will phase into flexible drawdown for the financial planning reasons set out in the answer to Q19. If a client has more than one CRA they can decide to treat each CRA differently by not including all accounts within the initial flexible drawdown application. If they choose to do so it will provide a less tax efficient use of their retirement funds. This is because more capital value will be needed to meet specific target income needs when using capped drawdown because of the GAD income factors needed to determine the maximum available income. Any subsequent decision to apply for flexible drawdown on an arrangement previously excluded will subject the client to the MIR requirements of the day. At that time, the current 20,000 threshold may have increased under a Treasury Order issued by a future Government. If this happens individuals may find they are then ineligible to have flexible drawdown on that account. Q20 Can a client transfer a flexible drawdown arrangement to another registered pension scheme? Yes, provided the registered scheme into which the transfer is to take place offers flexible drawdown. Any flexible drawdown fund transfer must go to an arrangement within the new scheme which holds no other funds when the transfer takes place. The CRA can accept flexible drawdown transfers from other registered pension schemes, subject to Old Mutual Wealth accepting the client s completed flexible drawdown declaration and the value meeting Old Mutual Wealth s minimum financial requirements. Q21. Can a client buy a Lifetime Annuity from a flexible drawdown fund? Yes, this is because in most circumstances the client has full control of how much income they draw from their flexible drawdown fund. Therefore, there should be less need for annuity purchase.

10 Calls may be monitored and recorded for training purposes and to avoid misunderstandings. Old Mutual Wealth is the trading name of Old Mutual Wealth Limited which provides an Individual Savings Account (ISA) and Collective Investment Account (CIA) and Old Mutual Wealth Life & Pensions Limited which provides a Collective Retirement Account (CRA) and Collective Investment Bond (CIB). Old Mutual Wealth Limited and Old Mutual Wealth Life & Pensions Limited are registered in England and Wales under numbers and respectively. Registered Office at Old Mutual House, Portland Terrace, Southampton SO14 7EJ, United Kingdom. Old Mutual Wealth Limited is authorised and regulated by the Financial Conduct Authority. Old Mutual Wealth Life & Pensions Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Their Financial Services register numbers are and respectively. VAT number When printed by Old Mutual this item is produced on a mixed grade material, which uses a combination of recycled wood or paper fibre from controlled sources and virgin fibre sourced from well-managed, sustainable forests. PDF7926/ R/August 2013