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Flexibility in capped drawdown

A drawdown arrangement that allows a client the flexibility to lock in a higher capped drawdown income limit is invaluable. We examine the issues that can affect the maximum income under capped drawdown and the options in a drawdown arrangement that are required to take advantage of them. This article is aimed at those individuals who are in capped drawdown which was available to enter into up to 5th April 2015.

Issues that will affect a client’s maximum income

There are several issues that either individually, or combined, could increase a client’s maximum annual income within a reference period. They are:

  • Increase in client age. – Potentially increases the income factor that is applied to the capital value of a client’s drawdown fund to calculate the maximum annual income.
  • Gilt yields. – Increases in gilt yields during a reference period could create the opportunity for a higher income by applying higher income factors to the capital value of the drawdown fund.
  • Increase in capital value. – The higher the capital value, the higher the potential maximum income. This will have the biggest impact, even where a client’s age and the underlying gilt yields remain unchanged since the previous crystallisation test.

What does a scheme need to provide for a client to take advantage of these opportunities?

It is important that an income withdrawal arrangement includes two features that will create the opportunity to increase the maximum annual income available within a reference period. They are:

1. Additional designation

Additional designation allows a post A-Day income withdrawal fund to add uncrystallised funds to an existing income withdrawal fund for further benefit crystallisation. At crystallisation the maximum income is recalculated on the total income withdrawal fund at that time. The new maximum will apply for the rest of the existing reference period.

Where the additional designation occurs during a pension year income will be rebased using 120% of the new income factor applicable, for the rest of the current reference period.

2. Member requested annual reviews

These enable the scheme to recalculate the maximum annual income for a client, from the start of the next scheme income year. It uses the capital value of the fund, the gilt yield and income factor applicable to the client’s age at the time of the review.

The client can accept the new income entitlement which will then apply for a new three-year reference period. Where the client is approaching age 75 it will lock in the new maximum income until the beginning of the scheme income year following the client’s 75th birthday if that is less than three years away.

Features of the Collective Retirement Account for capped income

  • Additional designation
    Available for post A-Day capped income arrangements. Client can use uncrystallised funds to rebase the maximum annual income for the rest of existing reference period.
  • Member requested annual reviews
    Available for pre A-Day and post A-Day capped income arrangements. Acceptance of rebased maximum annual income will start new three-year reference period.
  • Capped income available beyond age 75
    Provided clients have a Collective Retirement Account, capped income is available either before or after age 75. Client can then remain in capped income indefinitely or until the client wishes to secure a lifetime annuity.

The above list highlights the standard features now available within the Collective Retirement Account for clients where provision of capped income either currently applies or may be considered for the future. These features are important for any capped income withdrawal arrangement to offer, as they allow clients the flexibility to improve the maximum annual income they have available when circumstances create the ability to do so.

This article is based on Old Mutual Wealth’s interpretation of the law and HM Revenue & Customs practice as at January 2017. We believe this interpretation to be correct, but cannot guarantee it. Tax relief and the tax treatment of investment funds may change.

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