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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 - review triggered by specific events (position immediately before 6 April 2015)

Glossary PTM000001
   

Circumstances that trigger a review of maximum drawdown pension other than the start of a new reference period (position at 5 April 2015)
Putting (designating) extra funds into a drawdown pension fund (position at 5 April 2015)
When a drawdown pension fund is reduced by a pension sharing order (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.

Circumstances that trigger a review of maximum drawdown pension other than the start of a new reference period (position at 5 April 2015)

Paragraph 10(4) Schedule 28 Finance Act 2004

If the member is under 75, the following events trigger a recalculation of the maximum drawdown pension:

  • part of the drawdown pension fund is used to buy a lifetime annuity (see PTM062400)
  • part of the drawdown pension fund is used to provide a scheme pension (see PTM062300)
  • the member gets divorced and the drawdown pension fund is reduced due to a pension sharing order, or
  • only part of the funds in an arrangement have been used to provide a drawdown pension and later more funds are designated to provide extra drawdown pension under the same arrangement.

These events will trigger only a recalculation of the maximum drawdown pension. They cannot change the dates of the pension years or the three-year reference period.

The amount of the maximum drawdown pension will normally change from the start of the next pension year.

The exception to this rule is where extra funds are designated into the drawdown pension fund. If this produces a higher maximum drawdown pension, the higher amount will apply immediately. However, if it produces a lower maximum, the lower amount will apply only from the start of the next pension year.

If the member is aged 75 or over, the maximum drawdown pension will be recalculated every pension year. This means that no special recalculations are needed when buying a lifetime annuity or scheme pension or when the drawdown pension fund is reduced due to a pension sharing order. The only other time the maximum drawdown pension will be recalculated is if extra money is designated into the drawdown pension fund.

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Putting (designating) extra funds into a drawdown pension fund (position at 5 April 2015)

Paragraph 10(4) to (6) Schedule 28 Finance Act 2004

When extra funds are put into the drawdown pension fund there is:

  • a recalculation of the maximum drawdown pension, and
  • if the member is under 75, a lifetime allowance test (as a BCE 1 - see PTM088610) on the extra funds designated to provide drawdown pension.

The scheme administrator must calculate the new maximum drawdown pension at the date the extra funds are put into the drawdown pension fund. They cannot choose to use another date. The new maximum drawdown pension will normally take effect as soon as the extra funds are designated into drawdown pension.

In some situations the new maximum drawdown pension may be less than the current maximum drawdown pension. This can happen if the member has been taking the maximum drawdown pension and/or the pension fund investments have not performed well since the last valuation. If this happens the new maximum drawdown pension does not take effect until the start of the next pension year.

Example 1

On 1 January 2012, Jane takes part of her benefits under her other money purchase arrangement. Jane designates £140,000 to provide a drawdown pension.

Jane’s reference period runs from 1 January 2012 to 31 December 2014. Her scheme administrator calculates the basis amount as £9,380. For the pension years beginning 1 January 2012 and 1 January 2013, Jane’s maximum drawdown pension is 100% of the basis amount i.e. £9,380. As the next pension year begins after 26 March 2013, Jane can take a maximum drawdown pension of 120% of the £9,380 basis amount i.e. £11,256 for the pension year running from 1 January 2014.

On 1 February 2014, Jane’s drawdown pension fund is worth £110,000. Jane decides to put the rest of her benefits into payment. Jane designates £80,000 to increase her drawdown pension.

The designation of extra funds into the drawdown pension fund triggers a recalculation of Jane’s maximum drawdown pension. The calculation must be carried out as at 1 February 2014, the date the extra funds are designated into the drawdown pension fund. The scheme administrator cannot choose to use another day. Jane’s scheme administrator used the male GAD table (see PTM062530) to work out the new maximum drawdown pension using the following information:

  • the fund value after the additional designation (£190,000)
  • Jane’s age on 1 February 2014 (62), and
  • the 15-year UK gilt yield percentage for 15 January 2014 (3.5%).

The revised basis amount is £11,020. Jane’s new maximum drawdown pension is 120% of the basis amount i.e. £13,224 and applies from 1 February 2014, when the extra funds were designated into drawdown pension.

As Jane is under 75 when she adds extra funds to her drawdown pension fund, the designation of extra benefits also triggers a test against the lifetime allowance. The £80,000 extra funds designated into drawdown pension will be tested against the lifetime allowance.

For the drawdown year starting on 1 January 2015, Jane’s maximum drawdown pension is 150% of the basis amount.

Example 2

On 1 February 2012 John designates £140,000 from his money purchase arrangement to provide a drawdown pension. This is only part of his benefits under the arrangement.

John’s reference period runs from 1 February 2012 to 31 January 2015. His scheme administrator calculates John’s basis amount as £9,800. John can take a drawdown pension of up to £9,800 for the pension years running from 1 February 2012 and 1 February 2013. As the last pension year, in the reference period begins after 26 March 2013 (it starts on 1 February 2014), John’s maximum drawdown pension for that year is 120% of the £9,800 basis amount i.e. £11,760.

On 1 March 2013, John’s drawdown pension fund is worth £90,000. John decides to put the rest of his benefits into payment. John designates £80,000 to increase his drawdown pension.

The designation of extra funds into the drawdown pension fund triggers a recalculation of John’s maximum drawdown pension. The calculation must be carried out as at 1 March 2013, the date the extra funds are designated into the drawdown pension fund. The scheme administrator cannot choose to use another day. John’s scheme administrator used the GAD tables to work out the new maximum drawdown pension using the following information:

  • the fund value after the additional designation (£170,000),
  • John’s age on 1 March 2013 (61), and
  • the 15-year UK gilt yield percentage for 15 February 2013 (3.5 per cent).

The revised basis amount is £9,690. This new maximum drawdown pension should apply from 1 March 2013, when the extra funds were designated into drawdown pension. However, the new maximum drawdown pension is less than the original maximum drawdown pension. So the new maximum drawdown pension does not apply until the next pension year starting 1 February 2014. But as that pension year begins after 26 March 2013, John’s maximum drawdown pension for that year is 120% of the £9,690 basis amount i.e. £11,628.

As John is under 75 when he adds extra funds to his drawdown pension fund, the designation of the £80,000 into drawdown pension also triggers a test against the lifetime allowance.

For the drawdown year starting on 1 February 2015, John’s maximum drawdown pension is 150% of the basis amount.

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When a drawdown pension fund is reduced by a pension sharing order (position at 5 April 2015)

Paragraph 10(4) Schedule 28 Finance Act 2004

If the drawdown pension fund is reduced because of a pension sharing order following the member’s divorce, this will trigger a recalculation of the maximum drawdown pension if the member is under 75.

To find out more about pension sharing on divorce see PTM029000.

The new maximum drawdown pension will take effect from the start of the next pension year. The maximum drawdown pension for the current pension year remains unchanged. The scheme administrator must calculate the new maximum drawdown pension as at the date the pension sharing order is put into effect. They cannot choose to use another date.

Example

Tundi has a drawdown pension fund worth £1 million. This provides him with a maximum drawdown pension of £51,000. Tundi is in the middle of a reference period that runs from 1 June 2013 to 31 May 2016. Tundi gets divorced and as a result the Court makes a pension sharing order reducing Tundi’s drawdown pension fund.

The pension sharing order is applied on 27 July 2014. Following the reduction Tundi has £400,000 remaining in his drawdown pension fund. The application of the pension sharing order triggers a recalculation of Tundi’s maximum drawdown pension. The calculation must be carried out as at 27 July 2014, the date the pension sharing order was applied to the scheme. The scheme administrator cannot chose to use another day. Tundi’s scheme administrator uses the GAD tables to work out the new maximum drawdown pension using the following information:

  • the fund value after the pension sharing order has been applied (£400,000)
  • Tundi’s age on 27 July 2014 (52), and
  • the 15-year UK gilt yield percentage for 15 June 2014 (3.75%).

The revised basis amount is £20,000. The new maximum drawdown pension that Tundi can take is 150% of the £20,000 basis amount and this will apply from the start of the next pension year. That is 1 June 2015. So until 31 May 2015, Tundi can still be paid a drawdown pension based on the old maximum amount of £51,000, but from 1 June 2015 the maximum is £30,000.

The reference period remains the same: it will end on 31 May 2016. At the start of the new reference period, Tundi’s scheme administrator will calculate a new maximum drawdown pension.