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NEWSLETTER: Flexible Drawdown, Unisex GAD rates and the end of Protected Rights

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Contributed by MW Pensions
30 April, 2012

Contributed by MW Pensions. [www.mwpensions.co.uk]

This leaflet is solely for the use of financial and other professional advisors, members of the public should not rely upon it

Flexible Drawdown
Flexible drawdown was introduced with effect from 6th April 2011. Many advisors are still getting to grips with the opportunities it may offer to some of their clients. So we thought we would take a considered look at flexible drawdown, how it works and when it might be of potential use.

What is Flexible Drawdown?
It allows the member to take as much income from their pension as they want – provided they meet the “Minimum Income Requirement” test. It can also be beneficial for death benefits.

What is the “Minimum Income Requirement” test?
It means that the member must be in receipt of income of at least £20,000 per annum for life in total from any or all of the following sources:

  1. State pension
  2. Scheme Pension (more than 20 pensionable members) eg a Final Salary pension
  3. A Lifetime Annuity, provided it is RPI linked or cannot reduce
  4. A dependant’s pension under b and c is also allowed
  5. The pension must be from a UK Registered Pension Scheme or a relevant non-UK scheme

Note that the member must be actually receiving that pension – not entitled to it as a deferred pension payable from some future date.

What cannot be included in the “Minimum Income” test?
Anything that is not included in the above. Specifically drawdown pensions and purchased life annuities are not allowed.

What about income from relevant overseas schemes?
It is likely that the SIPP Provider will require a certified translation of the relevant scheme rules, so that they can ensure the HMRC requirements are being met. That is certainly our position.

The exchange rate at the declaration date will also have to be taken into account and this may be an issue if the £20,000 a year is marginal.

What about contributions?
No pension contribution can be made by or on behalf of the member in the tax year in which they take Flexible Drawdown

How is Flexible Drawdown taxed?
It is taxed at the member’s marginal income tax rate.

How is it payable?
It is payable under PAYE

When might Flexible Drawdown be relevant?
There are a number of possibilities – remember though that the member must be able to meet the Minimum Income Requirement (MIR):

  1. If they are already in capped drawdown and meet the MIR, they would avoid the need (and costs) of triennial reviews and have no maximum income limit
  2. If they meet the MIR and have a small pension pot (or pots), they could effectively cash them in (but PAYE needs to be set up first, so it takes time)
  3. It can assist death benefit protection before age 75. Consider someone with £1M uncrystallised pension assets. They want £50,000 income. If they take capped drawdown, then £200,000 becomes crystallised. So on subsequent death £867,500 is paid out after tax i.e. the £800.000 uncrystallised fund plus 45% of the remaining crystallised fund of £150,000. If they took £50,000 as flexible drawdown, the death benefit after tax would be £950,000.
  4. If they meet the MIR, they could take out all their pension funds, subject to paying tax at their marginal rate.

What about Protected Rights?
After 6.4.12 Protected Rights can be used for Flexible Drawdown

Unisex GAD rates
As a result of a ruling by the European Courts, GAD rates will have to be unisex from no later than 21st December 2012. HMRC and the Government are still considering how to do this in practice. But clearly there are potentially yet more issues for those in drawdown. Essentially if male rates apply to both sexes, female maximum drawdown levels will increase. If female rates apply to both sexes, the maximum drawdown levels for males will decrease. If a compromise mid position is reached, everyone will lose out!

And all this will be only 20 months after the maximum drawdown reduced from 120% to 100%.

Couple that with the very low 15 year gilt yields that are now the “norm” (at least for the next few years) and this is potentially yet another nail in the pension coffin.

Incidentally, the same unisex requirement will apply to annuity purchases, so insurers will have the same problems.

Let us hope that the Government, HMRC and Government Actuary’s Department take this opportunity for a fundamental review of GAD rates. It is a nonsense to link drawdown rates to 15 year gilt yields. For those in their 50’s or 60’s 15 years is far too short a period. Additionally, especially at those sorts of ages, logic would suggest that some element of notional equity holding should be taken into account in determining the presumed underlying investment return. 

Protected Rights to end on 6th April 2012
What happens from 6th April 2012?
Protected Rights for Defined Contribution schemes are abolished from that date.

What does this mean for Defined Contribution Schemes?
There  are several consequences:

  1. There will be no more contracted rebates
  2. Existing Protected Rights funds become “ordinary” funds, although some provider’s systems may not be updated to reflect this
  3. The special death benefit requirements for Protected Rights cease for deaths on or after 6.4.12
  4. The proportionality rules cease
  5. SSASs can accept Protected Rights– but the Rules of the SSAS may need changing – consult a lawyer
  6. Protected Rights funds can be invested exactly as non-Protected Rights funds

So we can forget all about Protected Rights funds after 6.4.12?
Sadly no. If anyone died before 6.4.12 with Protected Rights funds, their death benefits will be based on pre 6.4.12 rules and so, even though the resultant death benefits may be paid out in practice after 6.4.12, the pre-6.4.12 rules will still apply. So pension administrators will have to maintain historic Protected Records until they are satisfied that they have been notified of all pre-6.4.12 deaths.

Gilt Yield for Drawdown 
The gilt yields to be used for drawdown calculations are:

February 2012


March 2012


April 2012


We do not give financial advice and no comments here are intended as such. The above information is based on our understanding of the legislation governing pensions at the time of writing. Before taking any action you should consult a qualified financial and/or tax adviser. Levels, bases of and reliefs from taxation may be subject to change.

This Newsletter is intended for professional advisors only, not members of the general public

MW Pensions Ltd
Oaklands Park
Hooton Road
South Wirral 
CH66 7NZ

Tel: 0151 328 1777 Fax: 0151 328 0707

website: www.mwpensions.co.uk e-mail: admin@mwpensions.co.uk

Authorised and Regulated by the Financial Services Authority



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