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Taylor Patterson are still seeing a lot of pension clients being advised to move from capped drawdown to FAD. The question is why is this still a popular move?
Below is a quick overview of the key differences:
Capped Drawdown – this is the method of drawdown utilised pre 2015. As the name suggests a cap is put on the amount of pension that could be withdrawn each year. This is based on an individual’s age the underlying fund value and the Government Actuaries Department Rates (GAD) (largely similar to annuity rates). The maximum pension has to be tested every 3 years up to age 75 and annually thereafter which mean valuations have to be produced on these events.
One advantage to capped drawdown is the fact that an individual maintains their full annual allowance and can contribute up to £40,000 with full tax relief. Capped drawdown is not available to anyone drawing benefits for the first time now.
Flexi- Access Drawdown – as the name would suggest this is flexible and there is no limit to the amount that can be withdrawn as income each year (subject to the fund value). Of course large withdrawals will have greater tax consequences. The moment an individual takes even a £1 of income via this method their annual allowance is restricted to £10,000. This is the method all individuals will use when taking benefits for the first time since April 2015.
So why consider the move of transferring from capped drawdown to FAD?
It is generally driven by cost and the fact that these individuals are not going to contribute to their pension in the future.
Looking at a typical 76 year old SIPP or SSAS member. Under capped drawdown they will have the provider review fees to pay each year of around £100 to £200 but more costly will be surveyor fees if they have directly held commercial property that needs an annual valuation which can range from £500 to £2000.
If we now look at the loss of potential contributions there is no tax relief post 75 on employee contributions so this would only apply to employer contributions. In order to qualify for corporation tax relief the accountant must be satisfied that this contribution meets the “wholly and exclusively rules” in other words that individual is active in the business. For those aged 75 or over this is less likely. Also it is these individuals who tend to have larger pension pots for whom lifetime allowance and lifetime protection may be an issue.
It is clear to see why this move is being undertaken particularly for the over 75’s with direct property in their pension funds.
For those individuals who are under age 75 and the reduction in contribution allowance will not impact upon them, transferring over to FAD could be a consideration. However, prior to making any decision regarding your pension planning, we would always suggest that you speak with either your financial adviser or accountant.
For further information on capped drawdown or flexi-access drawdown, please contact your usual financial adviser or alternatively Kerry Houghton on 01772 550614 or via email firstname.lastname@example.org