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Greg Kingston: Investors still stuck in 100% income drawdown trap

Kingston Greg Gregory MM blog 2012

Yesterday HMRC finally published draft legislation to implement the return to 120 per cent GAD maximum income for capped drawdown. The implementation date is set as 26 March 2013 and whilst it cannot be earlier, it could prove to be later.

120 per cent GAD will apply to those with drawdown pension years that begin on or after 26 March 2013, and this is likely to lead advisers to recommend that new clients entering drawdown do not do so until on or after 26 March. Most will not be looking to immediately take the maximum level of income but the flexibility to do so will prove useful.

However, those that have a pension year that begins earlier will remain limited to 100 per cent GAD for another whole year. This is because the change is pegged to the start date of the pension year.

In the worst possible case an investor with a review date of 25 March 2013 will have to wait a full further year until 26 March 2014. It is not possible to force an income review mid-year to move directly to 120 per cent maximum GAD. Pension years remain fixed even if a review is requested mid-year.

As a result the plight of the very investors that originally brought this issue to prominence in the first place – those trapped at 100 per cent GAD income limits – are ironically the only ones that cannot immediately benefit from the changes.

To further rub salt into the wound of those caught in the 100 per cent trap, additional designations will not benefit from the restored 120 per cent GAD income limit. Additional designations within that pension year will still be calculated with reference to 100 per cent GAD and 120 per cent maximum GAD only will apply from the end of the pension year.

Restoring the 120 per cent GAD maximum income limit is a step needed in order to provide a relatively stable, consistent approach from which further reform can be properly thought through and discussed. The evidence as to why this was needed were the thousands of investors who, through the reduced income level and plummeting GAD rates, saw their incomes fall by as much as half.

Whilst we look forward to further reform, these investors should not simply be forgotten and brushed aside of another pension transitional period. There’s no good reason that, as with the removal of ASP, their income limits cannot immediately be returned to the new 120 per cent level. Some may even be able to benefit from the slight increase in GAD rates from February.

To end on a slightly lighter note, there’s been considerable speculation as to why 26 March was chosen as an implementation date.

This year’s calendar reveals little but a search back reveals that on 39 years ago on 26 March Denis Healey delivered the first three budgets that Britain would experience in 1974.

In it he proposed a Wealth Tax, introduced a Capital Transfer Tax and increased the top rate of Income Tax to 83 per cent, resulting in most investment being effectively taxed at 98 per cent. Britain eventually recovered from 1974 – let’s hope drawdown can do the same.

Greg Kingston is head of marketing at Suffolk Life

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