Under an income drawdown plan there may be several different tranches, or arrangements, of income dr...
Under an income drawdown plan there may be several different tranches, or arrangements, of income drawdown from which income withdrawals are being taken. Rather than each tranche having its own triennial review date, from 1 October 2000 it became possible to combine them to form a single triennial review date for the whole plan. This date applies for all tranches under the plan, making it possible to review them all at the same time, to calculate a single set of triennial income limits.
The review date used must be the anniversary of the vesting date of the first tranche that entered drawdown. Under an income drawdown plan, the income withdrawn in a 12-month period must fall between 35% and 100% of the relevant Government Actuary's Department (GAD) limit, which is calculated at the triennial review date.
If tranche review dates have been combined, there is a strong possibility that there could be less than 12 months between the last income date for a tranche and the new single plan triennial review date. In this case, the income drawdown within that period must still fall between the GAD limits.
In the final lead-up to the triennial review date of 1 October 2003, there will not be a full 12 months to take income from the second tranche. Instead, at least 35% of the GAD limit must be taken within six months (1 April 2003 to 1 October 2003) instead of 12 months (see example).
The period from an income date to a single plan triennial review date could be anything from one day to 364 days. This may influence clients' financial planning and the timing of phasing benefits. There are potential complications for those who wish to receive a regular stream of income and find this pattern disrupted.
Those who want to take the minimum income withdrawal could have problems as they may have to take it over a shorter period and therefore receive a higher level of income than they initially wanted. However, clients looking to take maximum income withdrawals may welcome the opportunity that this new flexibility provides.
Three years after a tranche of money has entered income drawdown, new minimum and maximum income withdrawal limits must be calculated. The new limits will be based on the member's residual fund, his/her current age and the gilt index yield on the 15th day of the month preceding the triennial review date. These limits remain in force for the next three years.
An increased flexibility in the timing of the calculation of these limits was introduced in the Finance Act 2000. Now, instead of having to calculate them on one particular fixed day, the limits can be worked out on any day within the 60-day run up to the triennial review date.
For example, if the triennial review date for the plan was 1 October 2003, the new income limits could be calculated on any date between 2 August 2003 and 1 October 2003. However, the new income limits would only take effect from the actual triennial review date, 1 October 2003, and would apply for the next three years.
This development gives IFAs the flexibility and time to prepare revised income withdrawal figures and make the most appropriate recommendations to their clients.
There is the possibility that the new income limits could be set before the income withdrawal, be it the final monthly instalment or even the whole withdrawal for the year, if it is being taken annually in arrears. The problem with this is that the limits could be based on an inflated fund value, resulting in higher income levels being set for the next three years. Consequently, the income drawdown fund could be depleted more quickly and IFAs and clients should be aware of this danger.
As income drawdown grows in popularity we welcome the introduction of the ability to transfer from one personal pension scheme to another while in drawdown. This new development will allow a client to transfer his/her pension fund if investment performance or service with the chosen provider is poor, offering a lot more choice and control over retirement benefits to IFAs and their clients. Consideration of whether to transfer or not will probably be built into discussions at annual and triennial review times.
On the other hand, transferring may involve a considerable amount of upheaval, not to mention cost. IFAs may wish to consider setting up income drawdown plans under a self-invested personal pension (SIPP), or at least with a provider offering external fund links. This means the problem of poor investment performance or inadequate fund choice can be overcome without the need to transfer.
There are two main changes to triennial reviews, both offering flexibility to clients once scheme rules have been altered to implement them. The single triennial review date for the plan will make it easier for clients who have a number of drawdown tranches to understand the operation of their drawdown plan. However, where the new rules have been adopted, IFAs will need to exercise great care to ensure the possibility of a shortened income period, between the last income date and the new triennial review date, is fully understood by clients and is used to their best advantage. This could have a significant impact on the financial planning aspect of drawdown and the timing of phasing benefits.
The other change is the introduction of the new 60-day calculation window. This will allow time for IFAs to prepare and discuss the revised income limits with their clients. It will also allow them to discuss requirements and make the appropriate recommendations in advance of the triennial review date.
Stewart Ritchie is pensions development director at
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