How to help clients make a drawdown transfer

Which arrangement? 

If there is more than one drawdown arrangement in a scheme, when it comes to the next crystallisation event funds can be added to any of the drawdown arrangements (pre A-day funds aside).

In most cases it won’t make a significant difference which arrangement you add the newly-crystallised funds to. 

However, there are two sets of circumstances where this might be important. 

First, if there is a flexi-access drawdown arrangement from which no income had been taken, and a capped drawdown arrangement.

Advice on drawdown transfers will be coming under scrutiny in the not too distant future.  

Further funds can be added to the capped drawdown arrangement to allow the client to access further pension commencement lump sum (PCLS) and, importantly, take more income without triggering the Money Purchase Annual Allowance (MPAA). 

The second scenario relates to those who may potentially have a lifetime allowance issue.

When the member reaches age 75 any funds in drawdown are tested against the lifetime allowance again.

At this point there is a “credit” for the amount of funds previously designated to drawdown and it is the growth that is tested. 

Example

In the table above £110,000 was originally put into drawdown in arrangement A.

At age 75 this arrangement is now valued at £10,000 as income has been taken.

At age 75 benefit crystallisation test BCE 5A takes place.

The amount tested at this event (£10,000) is reduced by the amount previously crystallised (£110,000).

Where this produces a negative result (-£100,000) the amount tested is cancelled out, so no lifetime allowance is used. 

However, when we look at arrangement B, the amount tested is £1,000,000 and the amount previously crystallised is £900,000, leaving £100,000 to be tested against the lifetime allowance at age 75. The fact that there is £100,000 “spare” in arrangement A is not relevant as each arrangement is tested separately. 

Where there are potential lifetime allowance issues and multiple drawdown arrangements it is therefore important to consider which arrangement to crystallise into, and which arrangement to draw income from.  

Statutory permissive override

When pension freedoms were introduced in 2015 there were many changes that needed to be made in a short space of time.

To help with this, legislation was put in place that meant any money purchase arrangement could offer the new types of pension payments without having to update their scheme rules.

This statutory permissive override can be found in Finance Act 2004 s273B and allows payments of drawdown pension for members, dependants, nominees and successors, along with other pension freedom payments.