The problem: Clients in drawdown have seen their income erode in recent years and are keen to use the restoration of the maximum drawdown limit to 120 per cent of GAD rates. How will these apply to clients after 26 March?
The solution: Two examples show how the new drawdown rules apply to new and existing clients. Howard started drawdown in 2007, while Hilda is thinking about whether she should start yet, as she had just reached age 60.
In 2007, Howard commenced drawdown with a fund of approximately £300,000 after taking his pension commencement lump sum. He had opted for GAD max income.
In November 2007, his max GAD was approximately £26,280 p.a. but at his November 2012 review this fell to around £15,900 p.a. due to a combination of falling gilt yields, the removal of the 20 per cent uplift to GAD rates, and the fact that his fund was a bit down in a volatile period.
This can be confusing. Between 2007 and 2012 he had followed a carefully defined investment strategy in line with his adviser’s recommendations, and had done very well – outperforming the market in fact. Indeed, his fund was pretty much the same as it had been net of the income payments. And yet, five years later, the income he could draw was being severely curtailed.
His adviser had discussed investment risk with him at the start of drawdown, but this had not included the unintended consequences of quantitative easing.
In his Autumn Statement, the Chancellor announced that the 20 per cent uplift to GAD rates would be restored and Howard is keen to know how to get his plan on to the new rate as soon as possible. April would suit him as he needs a bit of extra income and he knows the increase in the stock market early in 2013 would help, as any review would be on a higher fund level.
However, Howard had not reckoned on the inherent illogicality of new pensions legislation. His adviser has explained to him the details of how the 20 per cent uplift would work.
The increase in maximum drawdown applies from the start of the first pension year commencing on or after 26 March 2013. It cannot be applied any earlier than this. So, for Howard, they were looking at November 2013.
In November 2013 the maximum will be increased by 20 per cent from the start of Howard’s next pension year.
This increase will not be dependent on Howard reaching his three-yearly review and Howard will not need to request the increase. It will automatically be applied.
The increase will not involve a full review of the maximum pension. It will simply be a 20 per cent increase of the existing maximum when the new pension year starts.
For clients under the age of 75 the increase will not create a new three year review period. The existing three year review period will continue as normal. The client will only have a full review of their benefits at their next three yearly review (unless they request an earlier review at a pension year anniversary).
Where the maximum income of an existing client is based on 120 per cent of GAD then the maximum will stay at its existing level.
For Hilda, as a client going into drawdown for the first time, the situation was a bit more clear.
If she were to crystallise benefits prior to 26 March 2013, her maximum pension would be based on 100 per cent of GAD. It would be switched to 120 per cent of GAD at the end of her first pension year.
If she were to crystallise benefits on or after 26 March 2013 the maximum would be based on 120 per cent of GAD. She would have a three year, not a five year, review period (this is true unless a client reaches age 75 and the period is shortened).
Mike Morrison is head of platform marketing at A J Bell