The new GAD Limits Part 3
Part 3 comes hot on the heels of Part 2, with clarification now received from HMRC which means that (in a darkened room with a wet towel wrapped round my head) I can now understand how these new GAD rates will operate.
Broadly speaking, currently the maximum drawdown pension is 120% of the current GAD rates with 5 year reviews, going forward it will be 100% of the new (slightly worse) GAD rates with 3 year reviews. The question is, for those who want to maximum their income, are there ways of prolonging the 120% maximum and the 5 year review period?
At the risk of this blog turning into a full blown technical manual, here's my current understanding of the position:
People currently in full drawdown
They will currently be in a 5 year review period. They can ask for an interim pension review during this period and this will set a new 120% maximum for a new 5 year period, but this review can only take place on an anniversary date and must be requested in advance. As a result, this is only going to be available to people who happen to have anniversary dates between now and 5 April, anyone else will not be able to extend their current 5 year period. Some press articles on this subject have been wide of the mark in suggesting that anyone could get their pension reviewed on any date to suit them, that's not the case.
People not in drawdown
Many in this category will not be drawing benefits for some years, others may want drawdown in the near future but not at the maximum level. However, anyone contemplating drawdown and wanting to maximise their pension will need to start making plans soon.
Drawdown before 5 April will fix a maximum pension at the 120% level on current GAD rates for a 5 year period, so there could be a big difference compared with waiting till later in the year. Interestingly, this also works with phased drawdown in a single arrangement pension product as well (to get technical, some products like our SIPP work as single arrangements, with one review period, and the whole pension gets reviewed every time new drawdown takes place. Others work as multiple arrangements and each new drawdown is a new arrangement with its own review period).
In a single arrangement product which has started phased drawdown before 5 April, each new drawdown after April will review the entire pension on the new GAD rates but the maximum will still be 120% of this and the 5 year period stays intact. So, in theory, someone could crystallise £1 on 4 April and know that they could then take additional drawdown at the 120% level during the next 5 years. As I said, this only works in a single arrangement product, multi-arrangement products will process additional drawdown at the 100% level with 3 year review periods.
People already in phased drawdown
This is sort of a combination of the above points:
- If they are currently in a multi-arrangement product, they can crystallise any remaining funds before 5 April and get a 120% maximum for a new 5 year period for these funds. If they are in a single arrangement product, any remaining crystallisation is within the current 5 year period, so they might want to take a partial transfer out of their unvested funds to a new product first, to get a whole new 5 year review period.
- For their uncrystallised funds they can use the "crystallise £1 only" tactic referred to above, to keep the rest back for further crystallisations at the 120% level, but need to have moved these funds into a new single arrangement product first.
Still with me on all this? It's all subject to HMRC not tinkering with it between now and 5 April, and providers being able to cope with the work, so giving advice and taking action are going to be difficult in practice. But at least you know as much as me now and I can go and have a stiff drink and lie down.