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HMRC internal manual

Pensions Tax Manual

Member benefits: pensions: drawdown pension rules immediately before 6 April 2015: capped drawdown pension - reviewing the maximum annual amount from age 75 (position immediately before 6 April 2015)

Glossary PTM000001
   

What happens to a capped drawdown pension when the member reaches age 75 (position at 5 April 2015)
Calculating a member’s maximum drawdown pension on the first annual review after they reach age 75 (position at 5 April 2015)
Working out maximum drawdown pension on the continuing annual reviews when aged 76 or older (position at 5 April 2015)
Drawdown pension under several arrangements; aligning the pension years and maximum drawdown pension calculations

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.

What happens to a capped drawdown pension when the member reaches age 75 (position at 5 April 2015)

Paragraph 10B Schedule 28 Finance Act 2004

Capped drawdown can continue beyond age 75. On the member’s 75th birthday, the value of their drawdown pension fund will be tested against their lifetime allowance. It is up to the member whether to continue with drawdown thereafter or use the remaining funds to buy an annuity.

PTM088650 explains how pension rights are tested against the lifetime allowance when a member is 75.

When the member is 75 or older, there is still no minimum amount of pension they have to be paid each pension year. The maximum drawdown pension will continue to be 150 per cent of the basis amount. However, the maximum drawdown pension will now need to be recalculated at the start of every pension year. The switch over to yearly reviews occurs at the end of the pension year following the member’s 75th birthday.

The only other time the maximum drawdown pension will be recalculated when a member is aged 75 or older is if they designate extra money into their drawdown pension fund.

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Calculating a member’s maximum drawdown pension on the first annual review after they reach age 75 (position at 5 April 2015)

Paragraph 10 (1ZA), 10A and 10B Schedule 28 Finance Act 2004

The scheme administrator recalculates the maximum drawdown pension by using the appropriate GAD table to find the basis amount in the usual way. However, when they switch over to yearly reviews of the maximum drawdown pension, there is a choice of valuation dates that can be used to work out the new maximum drawdown pension.

The value of the drawdown pension fund immediately before age 75 can be used if both the member and the scheme administrator agree. This value will also be used for the lifetime allowance test on the member’s 75th birthday (BCE 5A). (PTM088650)

The scheme administrator can instead choose any day in a period of 60 days ending on the first day of the pension year starting after the member’s 75th birthday.

If no date is chosen under either of the above two options, the first day of the pension year must be used.

This choice of valuation dates only applies for the first annual review of the maximum drawdown pension that can be taken from the pension arrangement after the member’s 75th birthday. For all following recalculations of the maximum drawdown pension from the arrangement the scheme administrator must use a valuation date within the 60-day period ending with the first day of the new pension year.

Example

Barbara originally designated £100,000 into drawdown pension on 1 October 2011. Barbara’s three year reference period would normally run to 30 September 2014. However Barbara is 75 on 20 November 2012. This means that Barbara must switch over to annual reviews of her maximum drawdown pension on 1 October 2013.

Barbara’s scheme administrator needs to work out the maximum amount of drawdown pension Barbara can take from 1 October 2013.

The calculation of the maximum drawdown pension can be made:

  • immediately before Barbara’s 75th birthday, that is just before midnight on 19 November (the age used on the GAD tables in this instance would be 74), or

  • on any day in the period starting on 3 August 2013 to 1 October 2013.

Barbara asks her scheme administrator to use the value of her drawdown pension fund immediately before she is 75 and the scheme administrator agrees. The scheme administrator needs a valuation of the drawdown pension fund at the close of 19 November 2012 to carry out the lifetime allowance test on Barbara’s 75th birthday. Knowing they can use the same valuation to calculate Barbara’s maximum drawdown pension, the scheme administrator agrees to Barbara’s request.

The scheme administrator can only use this date to calculate the maximum drawdown pension because Barbara has asked to use this date. If Barbara had not asked the scheme to use this date, or if Barbara had not agreed to a request to use it by the scheme administrator, the scheme administrator could only choose to use a date between 3 August 2013 and 1 October 2013.

Using the value of Barbara’s drawdown pension fund on midnight 19 November 2012 and the FTSE UK 15-year gilt yield for 15 October 2012 the scheme administrator calculates the new basis amount as £8,300.

The new maximum drawdown pension will take effect from 1 October 2013. As this is after 26 March 2013, the maximum drawdown pension Barbara can take will be 120 per cent of the £8,300 basis amount i.e. £9,960.

A year later, on 1 October 2014, the maximum drawdown pension must be recalculated again. When calculating the revised maximum drawdown pension, Barbara’s scheme administrator must choose a valuation date between 3 August 2014 and 1 October 2014. For pension years starting on or after 27 March 2014, Barbara’s maximum drawdown pension is 150% of the new basis amount.

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Working out maximum drawdown pension on the continuing annual reviews when aged 76 or older (position at 5 April 2015)

Paragraph 9 Schedule 28 Finance Act 2004

The general method for working out the maximum drawdown pension remains the same as for lower ages. The GAD tables show equivalent annuities for each birthday from 76 to 85, but from age 85 onwards the equivalent annuity remains unchanged (although a yearly review is still required). To carry out the calculation the scheme administrator needs to know:

  • the value of the drawdown pension fund
  • the member’s age on the valuation date, and
  • a gilt yield percentage for 15-year UK gilts from the FTSE UK Gilt Indices for the 15th day of the month before the valuation date.

The scheme administrator can choose to value the drawdown pension fund and carry out the maximum drawdown pension calculation on any day in a period of 60 days ending on the first day of the member’s pension year. It is the scheme administrator who chooses the valuation date; the member cannot insist on a particular day.

Example

Luke is being paid a capped drawdown pension from his pension scheme. He is 76 and his pension year runs from 1 June to 31 May.

Luke’s scheme administrator needs to work out the maximum amount of drawdown pension Luke can take from the start of his next pension year.

Luke’s scheme administrator can carry out the calculation of the maximum drawdown pension on any day in the period of 60 days starting on 4 April and ending on 1 June. The scheme administrator chooses to use 1 May to value Luke’s drawdown pension and carry out the calculation of his maximum drawdown pension.

On 1 May 2013 Luke is 76 and his drawdown pension fund is valued at £375,000. Luke’s scheme administrator looks up the FTSE yield percentage for 15-year UK gilts on 15 April. This is 4 per cent.

According to the GAD tables this gives an amount of £94 pension per £1,000 drawdown pension fund. Luke’s new basis amount is £35,250 (375,000/1000 x £94 = £35,250). The maximum drawdown pension will take effect from the start of Luke’s new pension year on 1 June 2013 and will be 120 per cent of the £35,250 basis amount i.e. £42,300.

From the pension year starting 1 June 2014, Luke’s basis amount must be recalculated. And Luke can take up to 150% of this basis amount as drawdown pension, if he so chooses.

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Drawdown pension under several arrangements; aligning the pension years and maximum drawdown pension calculations

Paragraphs 10 and 10B Schedule 28 Finance Act 2004

It is not possible to change the pension year for an arrangement where the member is under the age of 75.

At age 75 or over, it may be possible to change the pension year. When the member is 75 or over the pension scheme administrator must calculate the maximum drawdown pension for each of the pension arrangements. Allowing all the pension arrangements in a scheme to have the same pension year may simplify administration.

The scheme administrator can change the pension year for an arrangement so that it matches the pension year of another arrangement held under the scheme. The agreement of the scheme administrator will be needed before the pension year for an arrangement can be changed. The pension scheme administrator does not have to agree to the request.

The scheme administrator cannot change the pension year for an arrangement without the members consent.

The pension year for an arrangement can only be changed once.

The pension year for an arrangement can be changed by bringing the current pension year to an end either early or late. The maximum drawdown pension will remain the same for the pension year, even though it is shorter/longer than usual.

The pension year of each arrangement can be different from the pension year for other arrangements under the scheme. The member can choose to change the pension year for just one, some or all of the arrangements under a scheme.

Whilst the member can make the pension arrangements have the same pension year, the maximum drawdown pension calculations are still carried out separately for each arrangement, and the limit on the drawdown pension still applies per arrangement, not to the whole scheme.

Example

Christina has benefits under three separate arrangements under the same pension scheme. From each of these arrangements, Christina is getting a drawdown pension.

Christina originally designated funds into drawdown pension under Arrangement 1 on 25 September 2011. So the pension year for this arrangement runs from 25 September to 24 September.

Arrangement 2 was designated on 1 December 2011. So the pension year for Arrangement 2 runs from 1 December to 30 November.

Arrangement 3 originally had funds designated into drawdown pension on 1 July 2013. So the pension year for Arrangement 3 runs from 1 July to 30 June.

Christina is 75 on 3 March 2017. So her pension arrangements switch over to annual review of the maximum drawdown pension as follows:

  • Arrangement 1: 25 September 2017

  • Arrangement 2: 1 December 2017

  • Arrangement 3: 1 July 2017.

Christina wants all her arrangements to have a pension year that runs from 1 July to 30 June. This means she needs to change the pension years for Arrangements 1 and 2 so that they match the pension year for Arrangement 3.

On 1 February 2018 Christina asks her scheme administrator if she can change the pension years for Arrangements 1 and 2 so that they run from 1 July to 30 June. At this point the maximum drawdown pensions for each arrangement are as follows:

  • Arrangement 1: £10,000 until 24 September 2018

  • Arrangement 2: £20,000 until 1 December 2018

  • Arrangement 3: £15,000 until 30 June 2018.

Christina’s scheme administrator agrees to the pension years for Arrangements 1 and 2 being changed to match the pension year of Arrangement 3.

The pension year for Arrangement 1 will run from 25 September 2017 to 30 June 2018 with a maximum drawdown pension of £10,000. On 1 July 2018 a new annual maximum drawdown pension will be calculated for Arrangement 1

The pension year for Arrangement 2 will run from 1 December 2017 to 30 June 2018 with a maximum drawdown pension of £20,000. On 1 July 2018 a new annual maximum drawdown pension will be calculated for Arrangement 2.