Capped drawdown changes

Transcription

1 ADVISER FACTSHEET Tech Talk April 2014 Capped drawdown changes As part of the James Hay Partnership s 2014 Budget analysis this Tech Talk looks at the change to the capped drawdown maximum introduced from 27 March Contents Member requests early review of maximum drawdown pension Additional fund designation Other events that trigger a drawdown review Pre 6 April 2006 drawdown and lifetime allowance testing Comment For professional advisers only

2 In light of the capped drawdown changes introduced from 27 March 2014 it is worthwhile looking at the impact of these changes on the maximum income that can be drawn by individuals and the implications this has in terms of testing against the lifetime allowance. The maximum income that can be drawn in a drawdown pension year is expressed as a percentage of the basis amount derived from annuity tables published by the Government Actuary s Department (GAD). An increase in the percentage used in the calculation, 120% to 150%, was announced in the budget affecting drawdown pension years starting on or after 27 March Bearing in mind that the anniversary of the drawdown year may be many months away, it may be some time before the member is able to take advantage of the higher percentage without opening up new tranches of drawdown. This has prompted questions from advisers on ways of introducing the increased maximum for existing tranches of drawdown earlier. What follows is a brief reminder of the rules covering capped drawdown reviews triggered by certain events and how pre 6 April 2006 drawdown rights impact on lifetime allowance headroom. Member requests early review of maximum drawdown pension For a member under age 75 the maximum amount of drawdown pension that can be taken in a drawdown pension year is set for a period of three years, or until the drawdown anniversary following the member s 75th birthday if earlier. This period is known as a reference period. A review of the maximum is required at the start of a reference period and post age 75 reviews are carried out on an annual basis. The recalculation of the maximum drawdown pension, linked to the start of the next reference period, will be carried out at a date chosen by the scheme administrator in the 60 day window ending on the next anniversary date. A request for a review to be carried out before the end of the reference period must be directed to the scheme administrator who has discretion over whether or not to agree to the request. Where agreement is forthcoming the current reference period will end immediately before the next anniversary date with the next reference period starting on the next anniversary date. 2

3 EXAMPLE 1 Jenna, aged 65, designated funds for drawdown on 1 December The basis amount derived from the GAD annuity tables, based on the funds designated for drawdown by Jenna was 10,000. Before the changes introduced from 27 March 2014 the maximum income levels for the first reference period would have been: 1/12/ /11/2014: 12,000 (120% of the basis amount) 1/12/ /11/2015: 12,000 1/12/ /11/2016: 12,000 The position following the changes introduced from 27 March 2014: 1/12/ /11/2014: 12,000 1/12/2014 5/4/2015: 15,000 (150% of the basis amount) Assuming the freedoms announced in the budget come into force, from 6 April 2015 Jenna will be able to draw as little or as much of her remaining drawdown fund as she decides. Note that any withdrawals will be treated as income and taxed accordingly. In this example the 150% maximum does not kick in until 1 December If Jenna requests a review before 1 December 2014 the impact would be as follows: 1/12/ /11/2014: 12,000 1/12/2014 5/4/2015: 150% of the recalculated basis amount The recalculated basis amount is determined at a date chosen by the scheme administrator in the period 3 October 2014 up to and including 1 December 2014 and is based on Jenna s age, drawdown fund on that date. Therefore the request has no immediate impact on the amount of income that could be drawn. Additional fund designation This occurs where a member holds uncrystallised funds and drawdown funds within the same pension arrangement, and a decision is made to add to the drawdown fund by crystallising some or all of the uncrystallised funds. Note that additional fund designation may not be an option under some defined contribution schemes because of the way they are structured. Where additional fund designation occurs, a test against the lifetime allowance is carried out where the member is under age 75, and the maximum drawdown pension is recalculated based on the member s age at that point and the value of the drawdown fund including the additional amount designated. If the resultant calculated maximum is greater than the current maximum the new maximum applies to the current drawdown year. Otherwise the new maximum applies from the start of the next drawdown pension year. EXAMPLE 2 Same detail as per Example 1. Assume that additional fund designation occurs on 1 June 2014 and the revised basis amount calculated as at that date is 11,000. The impact on the maximum income levels would be: 1/12/ /11/2014: 13,200 (120% of 11,000) 1/12/2014 5/4/2015: 16,500 (150% of 11,000) If the revised basis amount calculated as at the date of additional designation is 9,000, the impact on the maximum income levels would be: 1/12/ /11/2014: 12,000 (the current maximum) 1/12/2014 5/4/2015: 13,500 (150% of 9,000) 3

4 Other events that trigger a drawdown review The events covered under this heading are: Using part of a drawdown fund to purchase a lifetime annuity/scheme pension Drawdown fund is reduced following a pension sharing order on divorce In both cases the revised drawdown maximum is calculated at the time the event occurs. However, the new maximum will not take effect until the start of the next drawdown pension year. A calculation is not required where the event occurs in the last year of a reference period. EXAMPLE 3 Same detail as per Example 1. Assume that the drawdown fund is reduced by the operation of a pension sharing order on 1 August 2014 and the revised basis amount calculated as at that date is 8,500. The impact on the maximum income levels would be: 1/12/ /11/2014: 12,000 (the current maximum) 1/12/2014 5/4/2015: 12,750 (150% of 8,500) Pre 6 April 2006 drawdown and lifetime allowance testing Where an individual has rights that will be, or have been, tested against the lifetime allowance and in addition has pre 6 April 2006 rights in payment, the amount of lifetime allowance used up by the pre 6 April 2006 rights is quantified at the time of the first benefit crystallisation event (BCE). The amount of lifetime allowance used up is 25 times the annual rate of income paid under the pre 6 April 2006 rights at the time of the first BCE. Where the pre 6 April 2006 rights are in drawdown it is the capped drawdown maximum that is used in the calculation, even where the individual is drawing less than the maximum. As illustrated by the next example, the time at which benefits are taken may be crucial in view of the announced increase in the capped drawdown maximum. Note that in the situation where the pre 6 April 2006 rights are in flexible drawdown at the time of the first BCE, the amount of the lifetime allowance used up is 25 times the annual capped drawdown maximum that applied at the time the individual made the declaration for flexible drawdown. 4

5 EXAMPLE 4 Freddie is 70, and his pension rights consist of an uncrytallised SIPP, valued at 900,000 on 5 April 2014, and a drawdown fund in respect of rights that commenced pre 6 April He is looking to fully crystallise his SIPP and has no form of protection. The maximum annual income available from his drawdown fund is currently 12,000 and the last review was carried out 1 October Freddie did not apply for fixed protection 2014 and the value of his pension rights at 5 April 2014 ( 900,000 + [25 x 12,000]) did not exceed 1.25m, therefore individual protection is not an option. If Freddie fully crystallises the SIPP, taking his pension commencement lump sum and designating the remaining fund for drawdown, and assuming there is no change in the value of the SIPP the total amount crystallised would be 900,000. If this happens before 1 October 2014 the amount of lifetime allowance used up by the pre 6 April 2006 drawdown rights would be 300,000 (25 x 12,000), leaving Freddie with an unused lifetime allowance of 950,000. Therefore he has no lifetime allowance charge to account for on crystallising the rights under the SIPP. However, this is not the case if the benefits from the SIPP are taken on 1 October The amount of lifetime allowance used up by the pre 6 April 2006 drawdown would be 375,000 (25 x 15,000), leaving Freddie with an unused lifetime allowance of 875,000. Therefore on crystallising 900,000 under the SIPP Freddie has a lifetime allowance charge to account for on the 25,000 in excess of his lifetime allowance. 5

6 Comment While the changes brought in from 27 March 2014 are welcome, as demonstrated above it pays to have a good working knowledge of pension tax legislation in order to understand the full impact of the changes. For advisers managing client expectation is a daunting challenge at the best of times and the pension announcements contained in the budget will not make this task any easier. Therefore it is hoped that advisers will find the content of this bulletin useful. Further information John Dunn Pension Specialist Technical Support Unit Please do not hesitate to contact the Technical Support Unit with any further queries on: Pension Technical Support: pensions.techsupport@jameshay.co.uk Please note that every care has been taken to ensure that the information provided in this article is correct and in accordance with our understanding of current law and HM Revenue & Customs practice. You should note however, that James Hay Partnership cannot take upon itself the role of an individual taxation adviser and independent confirmation should be obtained before acting or refraining from acting upon the information given. The law and HM Revenue Customs practice are subject to change. The tax treatment depends on the individual circumstances of each client. James Hay Partnership is the trading name of James Hay Insurance Company Limited (JHIC) (registered in Jersey number 77318); IPS Pensions Limited (IPS) (registered in England number ); James Hay Administration Company Limited (JHAC) (registered in England number ); James Hay Pension Trustees Limited (JHPT) (registered in England number ); James Hay Wrap Managers Limited (JHWM) (registered in England number ); James Hay Wrap Nominee Company Limited (JHWNC) (registered in England number ); PAL Trustees Limited (PAL) (registered in England number ); Santhouse Pensioneer Trustee Company Limited (SPTCL) (registered in England number ); Sarum Trustees Limited (SarumTL) (registered in England number ); Sealgrove Trustees Limited (STL) (registered in England number ); The IPS Partnership Plc (IPS Plc) (registered in England number ); Union Pension Trustees Limited (UPT) (registered in England number ) and Union Pensions Trustees (London) Limited (UPTL) (registered in England number ). JHIC has its registered office at 3rd Floor, 37 Esplanade, St Helier, Jersey,JE2 3QA. IPS, JHAC, JHPT, JHWM, JHWNC, SPTCL, SarumTL and IPS Plc have their registered office at Trinity House, Buckingway Business Park, Anderson Road, Swavesey, Cambs CB24 4UQ. PAL, STL, UPT and UPTL have their registered office at Dunn s House, St Paul s Road, Salisbury, SP2 7BF. JHIC is regulated by the Jersey Financial Services Commission and JHAC, JHWM, IPS and IPS Plc are authorised and regulated by the Financial Conduct Authority. The provision of Small Self Administered Schemes (SSAS) and trustee and/or administration services for SSAS are not regulated by the FCA. Therefore, IPS and IPS Plc are not regulated by the FCA in relation to these schemes or services.(01/14) JHSTT 01 APR14 LD 6