With the radical overhaul of the pensions system a matter of weeks away, the income drawdown market is ramping up for significant and complex changes.
Virtually every specialist provider has confirmed its new drawdown proposition, often as part of an ‘account’ solution offering various access options, along with most pension schemes. A number of legacy schemes may not be providing flexible access on the new terms.
Many existing providers, such as Axa Wealth, Alliance Trust, Old Mutual, Standard Life, have also scrapped set up fees for drawdown as competitive pressure push down pricing. Again, on the other hand some non-specialist schemes are charging far more than most, prompting pledges from the opposition to cap charges.
With divergent appeoaches being taken and with drawdown set to become according to some the default for at retirement income, let’s take a run through of the options for taking income using this option from April.
Yes, it’s not just about ‘flexi-access’ drawdown - Capped drawdown savers are being grandfathered into the new regime and it will continue to act in the way it did pre-April 2015. The caveat is that to use this option customers must have set up their drawdown contracts by April 2015, so it’s not going to be an option for new clients after this date.
Customers will be able to draw an income up to a pre-set maximum calculated by using Government Actuary Department tables. As of the 2014 Budget this upper limit was increased to 150 per cent of effectively an equivalent annuity, but this has changed a fair bit in recent years.
Why would you tolerate this limitation? Because you can take income from the fund without triggering the new money purchase annual allowance of £10,000 that will apply for anyone who has flexibility accessed their pension.
This means a saver in capped drawdown will still be able to contribute £40,000 under the prevailing annual allowance - though that might not last long - with a carry forward annual allowance for three years. But as soon as they take more than the upper Gad limit, they immediately enter flexible drawdown and this is lost.
The government has allowed this loophole as it said it would be unfair to apply the £10,000 annual allowance to those in capped drawdown, since they had entered those schemes without knowing that they would be subject this limit.
At present, GAD rates are based on gilt yields of 2 per cent, although this might increase to 2.25 per cent in April as there has been a slight rise in yields since the March rate was set on 15 February. So at the moment maximum income is 3 per cent.
Andrew Tully, pensions technical director at MGM Advantage says: “If a member wants to take some tax-free cash and/or income while still paying further pension contributions, capped drawdown may offer an advantage.”
Claire Trott, head of technical support at Talbot and Muir, points out that the crystallisation benefits in capped drawdown are scheme specific.