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Pensions Tax Manual

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Member benefits: pensions: drawdown pension rules immediately before 6 April 2015: capped drawdown pension - maximum annual amount (position immediately before 6 April 2015)

Glossary PTM000001
   

How much can be taken as capped drawdown pension (position at 5 April 2015)
The maximum amount of a capped drawdown pension
How the pension scheme administrator works out the maximum capped drawdown pension (position at 5 April 2015)

Note: Capped drawdown that began on or before 5 April 2015 may continue, providing there have been no events since that date resulting in its conversion to flexi-access drawdown. But no new capped drawdown funds or flexible drawdown funds may be set up from 6 April 2015 onwards. See page PTM062700 for guidance on flexi-access drawdown funds.

How much can be taken as capped drawdown pension (position at 5 April 2015)

Section 165, pension rule 5 Finance Act 2004

There is no minimum amount that must be taken each year. But there is a maximum amount that can be paid each year as capped drawdown.

The amount of capped drawdown that can be taken from a pension arrangement is limited to the maximum drawdown pension (see next section) that can be paid from the arrangement less the amount of any short-term annuity purchased from the drawdown fund in the same arrangement.

Example

Judy has designated £400,000 into drawdown pension. Her scheme administrator has worked out that the maximum drawdown pension Judy can have each year is £22,000. Judy used funds from this drawdown pension fund to buy a short-term annuity. She is paid £4,650 from the short-term annuity each year. This payment of the short-term annuity reduces the amount of drawdown pension Judy can be paid as income withdrawal. The maximum income withdrawal on top of the short-term annuity Judy can have each year is £17,350 (£22,000 - £4,650 = £17,350).

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The maximum amount of a capped drawdown pension

The maximum amount of drawdown pension that a pension arrangement can pay the member each year is expressed as a percentage (see table below) of an equivalent annuity that could be purchased with the member’s drawdown pension fund. This equivalent annuity is known as the basis amount. The scheme administrator calculates the basis amount. The tax legislation specifies how they should do this. The basis amount is recalculated at least every 3 years (known as the ‘reference period’) - see PTM062540 for more detail.

The maximum amount of drawdown pension is measured over a ‘pension year’. A pension year for an arrangement runs for 12 months from the date the member first designates funds to provide drawdown pension under the arrangement. Each subsequent pension year follows this date. Once set, the member cannot change a pension year before they are 75. In limited circumstances a pension year can be changed after reaching age 75 - see PTM062550.

 

Table listing percentages of basis amount that may be taken in different periods

Reference period Drawdown pension year Maximum amount
Began before 6 April 2011 and ends after 25 March 2013 Began on or before 26 March 2014 120% of basis amount
Began before 6 April 2011 and ends after 25 March 2013 Began on or after 27 March 2014 150% of basis amount
Began on or after 6 April 2011 Began on or before 25 March 2013 100% of basis amount
Began on or after 6 April 2011 Began on or after 26 March 2013 but before 27 March 2014 120% of basis amount
Began on or after 6 April 2011 Began on or after 27 March 2014 150% of basis amount

Example

On 1 October 2011 Harry designates £100,000 to provide a drawdown pension. Harry has not previously drawn any benefits from this arrangement. This first designation of funds into drawdown pension sets Harry’s pension years. They are as follows

1 October 2011 to 30 September 2012 (the first pension year)

1 October 2012 to 30 September 2013 (the second pension year)

1 October 2013 to 30 September 2014 (the third pension year) and so on.

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How the pension scheme administrator works out the maximum capped drawdown pension (position at 5 April 2015)

Paragraph 10 Schedule 28 Finance Act 2004

To work out the maximum drawdown pension the scheme administrator needs to calculate the member’s basis amount. This is because the member’s maximum drawdown pension is a percentage of their basis amount (see above for details).

A scheme administrator must calculate the member’s basis amount by using tables specifically prepared for this purpose by the Government Actuary’s Department (GAD). The GAD tables can be found on the GOV.UK website(external users please see ).

There are three separate GAD tables:

  • for men aged 23 or over,
  • for women aged 23 or over,
  • for anyone aged under 23.

However, following the issue of an EU Gender Directive, from 21 December 2012 the scheme administrator should use the GAD table for men to obtain the relevant annuity rate for a woman in any of the following circumstances:

  • she is aged over 23 with a reference period starting on or after 21 December 2012 (including when the nominated period is before that date)
  • she is aged 75 or over with a drawdown pension year starting on or after that date (including when the nominated period is before that date)
  • she is aged over 23 and her basis amount needs recalculating following one of the events described at PTM062560 occurring on or after 21 December 2012.

The GAD tables set out how much of an equivalent annuity £1,000 of the member’s drawdown pension fund will buy.

To calculate the basis amount from the GAD tables, the scheme administrator needs to know:

  • the date of the calculation. When the member first gets a drawdown pension from an arrangement this is the date they designate funds into drawdown pension in that arrangement
  • the value of the drawdown pension fund on the calculation date
  • the member’s age on the calculation date, and
  • a gilt yield percentage for 15-year UK gilts from the FTSE UK Gilt Indices, using the figure for the 15th day of the month before the calculation date. So if the calculation date is 20 October the scheme administrator needs the gilt yield percentage for 15 September. If the 15th is a non-working day, the scheme administrator needs to go back to the nearest working day before the 15th.

The maximum drawdown pension figure thus found applies per pension year. If the member takes less than their maximum amount in a pension year, they cannot bring the balance forward to take in a subsequent pension year. Exceeding the maximum in a pension year results in an unauthorised payment.

The following example shows how a scheme administrator calculates both the basis amount and the maximum drawdown pension.

Example

Elaine tells her pension scheme administrator that she is designating £150,000 into drawdown pension on 1 September 2011. This is the first time she has taken benefits from the scheme.

Elaine’s scheme administrator has to work out the maximum drawdown pension Elaine can have. They know the date of the calculation is the date Elaine designates funds, i.e. 1 September 2011. They also know the value of the drawdown pension fund will be £150,000.

Elaine’s maximum drawdown pension will be 100 per cent of the ‘basis amount’. So Elaine’s scheme administrator needs to calculate the ‘basis amount’ for Elaine. To do this they need to know:

  • how old Elaine is on 1 September 2011, and

  • the yield figure on 15 August 2011 for 15-year UK gilts from the FTSE Gilt Indices.

The scheme administrator needs this information so that they can find Elaine’s basis amount using the 2011 GAD tables.

Elaine is 58 on 1 September 2011 and the 15-year UK gilt yield percentage on 15 August 2011 is 4.15 per cent. As this figure is not a multiple of 0.25%, it should be rounded down to the nearest 0.25 per cent. This gives a yield figure of 4.00 per cent for the calculation of the basis amount.

Using the 2011 GAD table for women aged 23 and over, the scheme administrator looks up the amount for a 58-year-old and a gilt yield of 4 per cent. This shows an annuity equivalent of £55 pension per £1,000 of drawdown fund.

Elaine has a drawdown pension fund of £150,000. This means Elaine’s basis amount is £8,250 (150,000/1,000 x £55 = £8,250).

Elaine’s pension years run from 1 September to 31 August. The maximum drawdown pension Elaine can have for the pension years beginning 1 September 2011 and 1 September 2012 is 100 per cent of the basis amount i.e. £8,250. As Elaine’s next drawdown year begins on 1 September 2013, i.e. after 26 March 2013, the maximum drawdown pension Elaine can have for that pension year is 120 per cent of the basis amount i.e. £9,900.