HM Revenue and Customs has revised drawdown legislation to avoid discouraging people from switching providers due to a potential 55 per cent tax hit when income is reviewed.
Original proposals for an increase in the capped drawdown limit to 120 per cent of GAD rates this March meant clients would likely suffer additional costs to transfer into a capped drawdown arrangement on or after 26 March 2013 due to a rule requiring an immediate income review.
Since April 2011 there have been transitional rules for those still on the pre-April 2011 maximum of 120 per cent GAD and five-yearly reviews.
These transitional rules stated that if a client was to transfer then they would move on to three-yearly reviews and have their maximum income limits recalculated at their next anniversary. This would have meant that they would move to the 100 per cent capped drawdown basis.
When the government announced the income limits for plan years starting on or after the 26 March would be increased to 120 per cent GAD, these transitional rules remained in place.
This would have meant that even though the client would still have their income calculated on 120 per cent GAD it would require a full review of the limits, likely meaning additional cost and a reduction in maximum incomes because the gilt yields have reduced since April 2011.
However, the newly-announced changes mean this will not be the case. Transferring a drawdown pension will not force a review if the plan anniversary falls on or after 26 March 2013.
Independent investment and pension advice firm John Eames Limited said: “This is positive news because there are a number of investors trapped in plans who may want to transfer to another provider, but do not want to have their limits reviewed and reduced at their next anniversary.”