Income drawdown and review dates
- The increased GAD factor of 120% automatically applies to pension years starting on or after 26 March 2013. This means that any new plans set up from 26 March 2013 will be on 120% basis.
- For plans set up between 6 April 2011 and 25 March 2013 (on 100% basis), at their first pension year on or after 26 March 2013, the maximum income available will increase to 120% basis.
- Unauthorised member payments apply if income exceeds maximum amount.
- Reviews have to take place at least every three years.
- Reviews can be triggered by certain events or can be requested by the member.
- In most cases, the maximum income that can be taken from a drawdown plan will change at each review.
- Transfer from an existing drawdown plan to a new drawdown plan is allowed.
How is the maximum amount of income calculated?
Under an income drawdown contract, a tax-free cash sum of up to 25% of the fund is paid to the member. The remainder of the pension pot can then be used to provide the member with income. The maximum amount of income that can be taken during a ‘pension year’ depends on the date the drawdown plan was effected:
- For drawdown plans effected after 26 March 2013, the maximum amount of income that can be taken during a ‘pension year’ is 120% of the Government Actuary’s Department (or GAD as it’s affectionately known) relevant annuity with no guarantee.
- For drawdown plans effected between 6 April 2011 and 25 March 2013, the maximum is 100% of GAD. However, at their first pension year on or after 26 March 2013, the maximum income available automatically increases to 120% of the basis amount.
- For drawdown plans effected before 6 April 2011, the maximum will normally be 120% of GAD, unless the member has had a compulsory review since 6 April 2011. If the member has a compulsory review after 26 March 2013 they will remain on 120% of GAD. If it was before then they will be on 100% of GAD until the start of the next pension year after 26 March 2013.
The member can take any level of income they like from their fund up to this maximum limit. We’ve produced an example to show how the maximum amount of income is calculated.
So what does the increase to 120% of GAD in March 2013 mean for new and existing members?
The increased GAD factor of 120% applies to pension years starting on or after 26 March 2013. This means that any new plans set up from 26 March 2013 will be on 120% basis for three years.
For plans set up prior to 6 April 2011, they will already be on the 120% basis and will have a five year reference period. These plans are therefore unaffected by the change until their next compulsory review date. At this point, the maximum income available will be calculated using 120% (again), but their reference period will be for three years instead of five.
If a plan set up prior to 6 April 2011 had a compulsory review before 26 March 2013 they will be on the 100% basis for three years and the following paragraph will apply to them.
For plans set up between 6 April 2011 and 25 March 2013 (on 100% basis), at the start of the first pension year on or after 26 March 2013, the maximum income available will increase by 20% e.g. for a member with maximum income of £10k on the current 100% basis, the maximum income amount available will increase to £12k. It is not necessary for the member to request an additional review to move to the 120% maximum and therefore the original three year reference period will be unaffected.
Pension years cannot be brought forward. Therefore, the 120% basis cannot be brought forward by doing an additional fund designation or doing a transfer in drawdown (TID). The increase to the 120% basis still only applies from the first pension year after 26 March 2013. So, for example, a drawdown plan with a pension year that started on 10 March 2012 will not be able to move to the 120% basis until 10 March 2014.
From now on, we’ll refer only to the new 120% of GAD basis but the comments apply equally to drawdown plans still on the old 100% of GAD basis.
What's a 'pension year'?
The maximum amount of income allowed applies for a 12 month period immediately after first taking income and any subsequent 12 month period. These 12 month periods are known as ‘pension years’. More information can be found in our article What's a pension year?
To make sure that the income drawdown fund continues to provide an income and isn’t used up too quickly, the maximum income that can be taken is reviewed. For members under age 75 this is done on the following basis for new plans:
- at least every three years,
- as a result of certain events,
- when the member requests an additional review.
Let’s look at each of the above now in turn.
Three year reviews
As a minimum, a review has to take place at least every three years. Each three year period is known as the ‘reference period’. The point at which a review is carried out is called the ‘reference date’.
The first reference date is on the first day of the fourth pension year following the designation of income drawdown, then again on the first day of the seventh year and so on. This continues until one of the following events occur:
- the entire pension fund is used to buy a lifetime annuity,
- the member dies.
At the review date the new maximum income is calculated in exactly the same way as the initial maximum with reference to the GAD tables, value of the income drawdown fund and member’s age. The new limit for the next three years is then set at 120% of the revised amount.
The maximum amount of income normally changes following a review. By how much depends on the investment performance of the fund, the amount of income taken during the reference period and the GAD interest rate at the time of review. If the fund has benefited from strong investment growth and a low income has been taken, the maximum level of income will undoubtedly rise. Conversely, if fund performance has been poor and maximum income has been taken, the new limit is likely to be lower than before. Also, the higher the GAD interest rate the higher the relevant annuity on which the GAD limit is based.
In addition to the basic requirement of a review taking place every three years, certain events trigger an additional review. These reviews don’t alter the existing pension year or reference period structure, or indeed the timing of the next three yearly review:
|When a lifetime annuity or scheme pension is purchased by part of the fund|| |
|The fund is reduced following a pension sharing event|| |
|Where additional fund designation occurs|| |
|Where there is full annuitisation and later designation of uncrystallised funds occurs under the arrangement|| |
Member requests an additional review
Of course, members don’t have to wait three years or for one of the above events to occur. They can request additional reviews but the final decision as to whether to grant one or not lies with the scheme administrator. The new limits apply from the start of the next pension year and can't start immediately.
Let’s take a typical example by looking at a scheme’s first three pension years. These form the first reference period:
1 October 2012 to 30 September 2013 (the first pension year)
1 October 2013 to 30 September 2014 (the second pension year)
1 October 2014 to 30 September 2015 (the third pension year)
As the member’s pension fund has performed very well since the maximum amount was first calculated on 1 October 2012, they’d now like to draw a higher income. Consequently, if on or before 30 September 2014 the member makes a request for a new reference date of 1 October 2014 and the scheme administrator agrees, the new reference period for the arrangement will look like this:
1 October 2014 to 30 September 2015 (the first in this new reference period but the third overall pension year)
1 October 2015 to 30 September 2016 (the second in this new reference period)
1 October 2016 to 30 September 2017 (the third in this new reference period)
If a member who is currently on the 100% basis requests an additional review after 26 March 2013, the scheme administrator will calculate the income using the 120% basis. However, the new maximum income amount will not take effect until the next pension year.
What happens at age 75?
Reaching age 75 is a Benefit Crystallisation Event (BCE) and so the drawdown fund will be tested against the lifetime allowance. Obviously, going into drawdown in the first place was also a BCE so, to avoid a ‘double counting’ against the lifetime allowance, the amount originally crystallised when the member went into drawdown is deducted. Only the balance (if any) therefore counts as an additional BCE amount.
The review dates also change – the maximum drawdown pension will now need to be recalculated at the start of every pension year. The switch over to yearly reviews will happen at the end of the pension year following the member’s 75th birthday.
Is it possible to transfer an existing drawdown plan to a new drawdown plan?
Yes it is. However, what happens with a transfer in drawdown (TID) will depend on the GAD basis the member is on with current provider.
If the member is currently on 100% basis, a TID will come across and continue on 100% basis until the start of next pension year, at which point the existing maximum income amount will automatically increase by 20%.
The Government announced a change on 7 March 2013 which means TIDs, where the ceding drawdown is on the old 120% basis, will now be treated differently. Previously, the situation was that if the ceding drawdown plan was on the 120% basis (i.e. the current reference period started prior to 6 April 2011), a TID would spark a full GAD review at the start of the next pension year. The amended legislation means that a review will no longer be triggered if the next pension year starts after 25 March 2013, regardless of whether the TID itself happens before or after that date. The GAD limit will therefore remain at the same level in the receiving drawdown plan until the end of the five year reference period at which point a full GAD review will be due.
Registered Pension Scheme Manual - Transfers in drawdown.
What if the limits are breached?
Well, bad things happen. An unauthorised member payment is levied if the amount of income paid in a pension year exceeds the maximum allowed. The member is charged 40% on the excess amount. Furthermore, these additional charges may also apply:
- a scheme sanction charge, and
- an unauthorised payments surcharge.
In most situations the maximum income that can be taken from a drawdown plan will change at each review, depending on investment performance,the amount of income taken and the prevailing GAD interest rate. Members also need to be aware that certain actions e.g. designating additional funds, will trigger a review.
Published 26 February 2008
Updated 3 January 2014
The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice.
Any research and analysis has been provided by us for our own purposes and the results of it are being made available only incidentally.
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