Adrian Walker discusses how new drawdown rules could trigger an advice point for pre-A-Day drawdown clients close to LTA threshold
Many advisers will be assessing the impact the new drawdown rules will have on their client base. One set of clients who will need a more considered approach are those who moved some of their pension into drawdown pre-A -Day and who still have some money purchase savings remaining to provide further retirement income.
The approach and advice issues raised will be of particular concern for those whose pension fund values may be approaching the lifetime allowance (LTA) threshold.
The LTA threshold was introduced as part of the A-Day changes. So any clients who started taking drawdown prior to A-Day did not have those funds initially tested against a LTA.
However, the first time a client moves money into drawdown post A-Day, the client's available LTA is tested, not only on the value of the new monies being crystallised, but on the deemed value of the pre A-Day income the client is already receiving.
The capital value of the client's pre A-Day income uses a conversion factor of 25 times the maximum annual income available to the client at the time more money is crystallised.
The higher the maximum income already being received by the client, the greater the amount of LTA utilised. This may create an issue for those at risk of breaching the LTA threshold (currently £1.5m).
Implications of new rules
The impact of the new drawdown rules that start to take effect from 26 March will have different implications depending on particular client circumstances.
Clients with pre A-Day drawdown arrangements will now be in a three year statutory review period. The current maximum annual income will increase by 20% from the scheme income year that starts on or after 26 March.
If they are thinking of using more of their pension savings to provide additional income, doing so before the increase takes effect will reduce the amount of the LTA they have been deemed to use up.
This means all pre A-Day clients, will need special consideration if they have further money to be moved across to drawdown. One key point to consider is whether money should be moved into drawdown now rather than wait until the client reaches their new scheme year following 26 March. The table below shows that less LTA is utilised if money is moved into drawdown before the 20% uplift comes into effect:
Example: Client moves £200,000 of unused pension savings into capped drawdown now (before the 20% uplift), having an existing pre A-Day drawdown fund which is in a three years review period with a current maximum annual income of £20,000.
|Move money into drawdown now||Move money into drawdown after new scheme year following 26 March 2013
|Maximum income amount p.a.||LTA calculation||Maximum income amount p.a.||LTA calculation|
New benefit crystallisation
|Existing income||£20,000||25 x £20,000 = £500,000||£24,000||25 x £24,000 = £600,000||£100,000|
|Total Lifetime Allowance Used up|| £700,000
or 46.67%% of LTA
or 53.33% of LTA
or 6.67% of LTA
As the table shows, if someone is currently taking an income of £20,000 p.a. and is looking to increase their retirement income, moving funds into drawdown after the new 20% uplift takes effect will, in this example, use up £100,000 (6.67%%) more of their LTA.
It is worth remembering that clients may not actually need to move more money into drawdown if the 20% automatic uplift provides them with the extra income required.
If it does not, then advisers need to be aware of when the 20% uplift will take place, i.e. when the start of the scheme income year on or after 26 March will be, so that they can advise the client to crystallise less of their unused savings now to meet the shortfall, reducing, in a different way, the LTA they use up in this exercise
Even if someone doesn't need to take additional income immediately, it may still be beneficial to move the money across to drawdown now, so as to trigger the calculation before the 20% uplift takes effect.
Money being moved into drawdown is exposed to the 55% death tax, however, if someone was considering this move anyway, or they are approaching age 75, then it really could pay to take action sooner rather than later.
With the LTA reducing to £1.25m on 6 April 2014, clients at risk of breaching the new £1.25m LTA should consider applying for fixed protection by 5th April 2014.
In summary, clients with pre-A-Day pension income could benefit from financial advice if they have money left to move into drawdown. Inadvertent action could use up more of their available LTA than is necessary and, for some, this could put them at risk of breaching the LTA.
Moving funds into drawdown ahead of the uplift coming into effect will mean less LTA is utilised, so clients could consider taking this course of action even if they do not currently need the extra income.
Adrian Walker is head of retirement planning at Skandia
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