PENSIONS – PENSION REFORM 2014/15
Synopsis: Pre A day pensions in drawdown will be tested against the LTA when the first BCE occurs post A Day. If the first test post A Day has not occurred to date, the increase in the maximum drawdown income to 150% of the relevant annuity will have a sizeable impact on the value of the pre A Day drawdown fund.
Date posted: Tuesday, June 17, 2014
Where a member with no enhanced protection has pre A-Day capped income withdrawal benefits, these are not assessed against a member’s lifetime allowance until the first occasion a BCE has arisen in respect of the member post A-Day. At that time these benefits are attributed a value equal to 25 times the maximum drawdown the member could have been taking at the time of the BCE.
For drawdown years commencing on or after 27th March 2014, the maximum drawdown pension has increased to 150% of the relevant annuity. This will increase the value of the fund tested against the LTA.
It’s important to remember that there is no LTA charge levied against the pre A-Day pension benefits, but it may extinguish 100% of the members LTA and the uncrystallised amount may all be subject to a LTA charge.
Eg:
Fred has pre A-Day drawdown benefits and no post A Day BCE’s. His drawdown year ends on 30th June. His maximum income in the pension year ending 30th June is £40,000.
Fred has an uncrystallised SIPP valued at £250,000.
If Fred crystallised his SIPP before the 30th June, the amount tested against the LTA is:
25 x £40,000 = £1,000,000
uncrystallised SIPP £ 250,000
—————————————–
Total £1,250,000
So Fred can crystallise his SIPP without incurring and LTA charge.
If Fred waits until his maximum drawdown income is increased to GAD max of 150% the calculation will be:
25 x £50,000 = £1,250,000
uncrystallised SIPP £ 250,000
—————————————–
Total £1,500,000
Fred will therefore be liable to the LTA charge and if he draws the SIPP as a lump sum will be at 55% (£62,500)
Flexible drawdown:
Where a member has made a successful application for flexible drawdown there is no longer any maximum income. The Finance Act 2011 therefore provides that the value of the pre A-Day benefits in flexible drawdown will be taken as 25 times the maximum income the individual could have received in the tax year in which he commenced flexible drawdown, using the capped drawdown limits.
It will be interesting to see what GAD rates, if any, are retained for valuation purposes from April 2015.
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