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Drawdown – what advisers should review
The much awaited 20% uplift in income drawdown will come into effect 26th March 2013, and will automatically apply from the start of the client’s pension income year following that date. Kerry Houghton SIPP & SSAS Business Development Manager looks at key areas all advisers should be reviewing with clients.
So who will be affected by this change and when?
Clients on 5 year statutory reviews
For clients who set up drawdown arrangements before 6th April 2011, the maximum will already be on the 120% basis, unless there had been a formal pension review reducing it to 100%. If it has been reduced, then at the first commencement date of the next pension year, on or after 26th March, the limit will increase to 120% of the previous amount. Their current income will be unaffected by the change except where the scheme income year that starts on or after the 26th March 2013 is subject to a statutory review.
In many cases, that review will include the 20% uplift, which will then see a reduction in their maximum annual income due to lower gilt yields and income factors than those used for their current pension.
Clients on a 3 year statutory review
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. For example if your review date is the 20th May the uplift will apply from the 20th May 2013.
When a change can be brought forward, is there any opportunity to improve income?
Legislation provides triggers that allow a recalculation of income other than when a statutory review falls due. If these triggers are available in clients’ drawdown arrangements then there is the potential for some clients to increase income beyond the 20% level.
Taylor Patterson allows for annual reviews at a cost of £150 providing it is requested in advance of the pension anniversary.
An increase may well be available if the review was only completed last year due to the recent rises in the stock markets and GAD rates. If the review was 2 years ago and they are taking maximum benefits this is less likely to be the case.
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 GAD factors now applying to which the 20% uplift will be added.
Post the 26th March it looks as though a transfer will no longer trigger a review at the next anniversary date, however, we await further details and clarification on this matter.
Maximising the benefit date
Advisers seeing clients prior to the 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.
There are many points to be considered, 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 along with rises in the stock market.
Advisers need to be aware that some clients may have experienced a decline in fund value since their last review, and this, together with the fall in gilt yields could reduce the benefit of any re-calculation. You should also factor in the cost of such a review which may include a revaluation of a property.