One item that could be overlooked in the recent budget statement is the fact we finally have confirmation of the increase to 120% of GAD maximum for Income Drawdown.  This will come into effect from 26th March 2013.  At last all Income Drawdown clients can let out a big sigh of relief.  Retirement planning now has gained some extra flexibility.

In recent years there has been a number of factors going against Income Drawdown pensioners.  With GILT yields falling to a 50 year low, along with falling equity values, many Income Drawdown clients suffered significant falls income when HMRC reduced maximum income levels to 100% of the GAD rate.  The move back to 120% of GAD, along with improving equity performance, will bring a much welcome relief to many unsecured pension clients.

Here is the very dull and boring technical blurb . . . .

If you are already in Income Drawdown:

• Where your maximum income is based on 100% of GAD, you will not benefit from the 20% increase until the start of your next drawdown year.
• The increase is not dependent on reaching the next three-yearly review and you do not need to request the increase. It will automatically be applied.
• The increase does not involve a full review of the maximum pension. It will simply be a 20% increase of your existing maximum when your new pension year starts.
• Those of you under the age of 75 the increase will not create a new three year review period. The existing three year review period will continue as normal and you will only have a full review of benefits at the next three yearly review (unless you request an earlier review at a pension year anniversary).
• Where your maximum income is based on 120% of GAD then the maximum will stay at its existing level.

If you are going into Income Drawdown for the first time:

• Where benefits are crystallised prior to 26 March 2013 your maximum pension will be based on 100% of GAD.  It will be switched to 120% of GAD at the end of your first pension year.
• Where benefits are crystallised on or after 26 March 2013 your maximum pension will be based on 120% of GAD. You will have a three year, not a five year, review period (unless you reach age 75 and the period is shortened).

If you are changing your existing Income Drawdown strategy:

• Generally, this does not bring forward a switch from the 100% maximum to the 120% maximum.
• Where you have maximum drawdown is based on the 100% rate, any additional crystallisation will be reviewed at 100%.  You will only move to the 120% rate at the start of their next pension year.
• Remember that where your benefits are reviewed under this rule and the maximum income drops, the drop only takes effect from the start of your next pension year.

If you have multiple tranches of crystallised Income Drawdown benefits:

• Each individual tranche of benefits at the 100% limit will be moved to the 120% limit separately as each new pension year for a tranche begins.
• Those with some tranches at 100% and some at 120% will only see an increase in respect of those tranches with the maximum based on 100%.

If you are transferring in crystallised Income Drawdown benefits:

• A transfer in of crystallised benefits which are subject to the 100% maximum does not bring forward the review to the 120% maximum. Provided the next pension year starts on or after 26 March 2013, the transferred benefits will be switched to the 120% maximum at the start of the next pension year. If the next pension year following the transfer starts before 26 March 2013, the switch to the higher limit won’t take place until 2014.
• A transfer in of crystallised benefits which are subject to the 120% maximum under the post-26 March 2013 limits does not cause any sort of review of benefits. The existing three year review period stays in place (unless shortened if they reach 75).
• A transfer in of crystallised benefits which are subject to the 120% maximum under the pre-6 April 2011 limits was potentially going to be a little more complicated.  Legislation under Finance Act 2011 brings forward the full GAD review of any pre-6 April 2011 benefits to the end of the pension year where a transfer takes place.

If you are a female Income Drawdown investor:

• When benefits are switched from the 100% maximum to the 120% maximum there will be no requirement to re-jig the original figures using the male drawdown tables. The existing maximum based on the female drawdown table will be increased.
• They will only switch to the male tables at their next full GAD review.

Phew . . . 

Wow – You are still with us? Congratulations!!!

You can see that HMRC don’t make the world of flexible pension planning too easy for the average person out there.  Trying to implement a successful Income Drawdown strategy involves so many aspects of financial planning including, a good handle on advanced pensions knowledge, understanding of tax planning and risk management skills to match your income requirements.  If that’s not enough you’ll need a good pension provider who can handle all these complexities.  By the way there are not too many providers out there who can successfully deliver an effective management platform in this respect.

As you can see Income Drawdown rules are so complex and involved it is all too easy to get it all wrong.  In the wrong hands Income Drawdown can be a destructive tool which could damage someone’s retirement position for many years to come.

However, with the right level of understanding and experience of implementing  an Income Drawdown strategies it can be a powerful tool within structured Financial Plan.  The benefit includes the flexible and timely delivery of tax efficient income, ensuring the most efficient use of pension assets.

If you are thinking about implementing a Income Drawdown as part of your retirement planning it is always advisable to seek the guidance from a Chartered Financial Planner with advanced pensions knowledge who can help you get the most out of your retirement.

March 2013

Important Note: A big thank you to Mike Parker FPFS, IMC at The SIPP Centre for all the technical input to this article.