What was announced?
The Budget announced that with effect from 27 March 2014 the maximum income from capped drawdown will increase from 120% of GAD to 150%. This follows the earlier increase to 120% of GAD from 100% last year.
The Finance Act 2004 (FA04) details payments that a registered pension scheme is allowed to make to or in respect of its members. Pension Rule 5 in section 165 limits the amount of income from a capped drawdown plan that may be taken within a drawdown pension year to 120% of the ‘basis amount’. This limit will now be 150% of the basis amount. This is an increase of 25% in the maximum available income.
A recalculation of the basis amount does not result in the new limits applying e.g. on additional designation, partial annuitisation, divorce or member request. The new limit will apply for drawdown pension years starting on or after 27 March 2014.
For those who have an income large enough to fulfil the Minimum Income Requirement (MIR) there is no such cap and as much or as little as desired can be taken, subject to tax at the member’s marginal rate. Currently a relevant income of £20,000 is required, as defined in FA04 schedule 28 paragraph 14A. The MIR will reduce to £12,000. This is will also apply to dependants flexible drawdown (paragraph 24C).
What does it mean?
Income amounts should not be the key driver in choosing the correct retirement income vehicle so the impact will depend on the reasons for choosing the drawdown route, either capped or flexible.
People may consider delaying entering new drawdown arrangements until after the effective date or else they would have to wait one complete year for the new 150% limit to apply.
With one exception, there is no action available which will bring forward the move to the 150% limit on capped drawdown as there is no provision in legislation which would bring forward the start of a drawdown pension year. The exception to this would be for pension years starting after age 75 with multiple arrangements. In that situation, it may be possible to have one or more drawdown pension years aligned. Those members recycling their drawdown income to maximise their tax free cash and death benefits may choose to increase their contributions to maximise efficiency.
For members now eligible to enter flexible drawdown it is important that a review of their tax position is carried out. As no further pension contributions can be made in the tax year a member enters flexible drawdown so the benefit of additional income should be weighed against losing the ability to reduce adjusted net income with pension contributions. The second tax consideration is that, as with current drawdown income, the amount will be taxed at the members marginal rate making timing important.
Clearly, where incomes are increased the investment portfolios underpinning the drawdown contract may need assessed to gauge the impact of the extra withdrawals.