The new drawdown rules will undoubtedly bring much needed relief to many pensioners. Now that the detail has emerged regarding how these changes are to be implemented, advisers can start planning what action is needed says Adrian Walker.
The 20% uplift in income drawdown will come into effect from 26 March 2013, and will automatically apply from the start of the client's scheme income year following that date.
Unfortunately there is nothing advisers can do to bring this change in any quicker. Even if an adviser triggers a recalculation point, the 20% uplift will still not take effect until their new scheme income year.
Who is affected by this change?
Clients in five year statutory review period
Clients who set up drawdown arrangements before 6th April 2011 have a maximum annual income that already includes a 20% uplift.
Their current income will be unaffected by the change, except where the scheme income year that starts on or after 26th March 2013 is subject to a statutory review.
In many cases that review, which will include the 20% uplift, will see a reduction in their maximum annual income due to lower gilt yields and income factors applying than when the current maximum income was calculated.
Clients in a three year statutory review period
These clients will see the 20% increase applied to their maximum annual income entitlement automatically from the start of the scheme income year that begins on or after 26th March 2013.
Why is it important to take action and contact clients?
Can anything be done to improve income even further?
Legislation provides triggers that allow a recalculation of income other than when a statutory review falls due. If these triggers are available in client's drawdown arrangements, there is the potential for some clients to increase income beyond the 20% level.
What can trigger a re- calculation?
Annual Rebasis reviews may be available within a scheme. Annual reviews for scheme income years starting on or after 26th March 2013 may create a higher potential annual income in addition to the 20% uplift which the client can accept and lock in for a new three year reference period
Additional designation may be available for clients who started capped drawdown on or after 6th April 2006. Clients can add uncrystallised funds to their existing drawdown fund forcing a recalculation of the maximum annual income for the remainder of the current statutory review period.
If this is applied to a scheme income year that starts on or after 26th March 2013 the calculation will include the 20% uplift. If applied in the scheme income year that starts before 26th March 2013, the 20% uplift will apply from the start of the next scheme income year to the new maximum income.
Who could benefit from using these triggers?
Female clients who started drawdown before 21st December 2012 may benefit from the recent increases to income factors resulting from gender equality legislation. A recalculation of their current maximum annual income could increase their income using the higher income factors now applying, to which the 20% uplift will be added.
Recent stock market performance may have increased the capital value of clients drawdown funds since previous maximum annual income calculations took place. Clients can benefit by converting those gains into an immediate higher maximum annual income that will then increase by the 20% uplift from the start of the scheme income year beginning on or after 26th March.
New drawdown clients
Advisers seeing clients prior to 26th March, who want to go into capped drawdown for the first time, and want to withdraw the maximum permitted amount, should consider advising the client to wait, if possible, until after 26th March. If they do, they will have immediate benefit of the 20% uplift rather than having to wait at least a year.
Clients phasing into capped drawdown
Some clients phase money into drawdown on a regular basis as their income needs arise. It could be that the 20% uplift, when applied, will reduce the amount of unused pension savings they need to phase to meet their short term income needs.
There are many points for advisers to consider. The change provides the opportunity to review with clients how this change will affect their retirement income planning. The benefit for many female clients resulting from the gender neutrality changes is a prime example.
Advisers need to be aware that some clients may have experienced a decline in fund value since their last calculation point, and this, together with the fall in gilt yields, could reduce the benefit of any recalculation.
Adrian Walker is head of retirement planning at Skandia
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