The tables used for capped drawdown maximum income calculations have been updated. We look at the reasons for the change and what the impact could be.
Changes to capped drawdown tables
Capped income drawdown involves taking a pension directly from a fund instead of buying an annuity. However, there’s a limit on the maximum amount of income that can be withdrawn during a year and this limit is reviewed on a frequent basis. Tables are used to establish the maximum income available per £1,000 of an individual’s fund.
The tables have recently been updated and from 1 July 2017 the new drawdown tables should be used for any income calculations.
Why have the tables changed?
The current tables allow for a minimum 15-year UK gilt yield of 2 per cent. In December 2011, HMRC published a newsletter stating that if 15-year UK gilt yields were to fall below 2 per cent, for the purposes of calculating the maximum income a minimum of 2 per cent should be used. In recent months the actual yield has been below 2 per cent.
The new tables have been updated to allow for gilt yields between 0 per cent and 2 per cent and from 1 July 2017 the minimum of 2 per cent will no longer apply.
Also, there are now only two tables, one for those above the age of 23 and one for those below 23. This is just a tidying-up exercise by HMRC as the male table has been also been used for females since 21 December 2012 for those over age 23. There weren’t separate male and female tables for those under age 23.
What could the impact be?
The maximum amount of income that can be taken during a 'pension year' is 150 per cent of the Government Actuary's Department (or GAD, as it's affectionately known) relevant annuity with no guarantee taken from the tables. The individual can take any level of income they like from their fund up to this maximum limit.
Let’s take an example of someone aged 65 with a fund of £100,000 and assume gilt yields are 1.5 per cent. Under the pre-1 July basis, their maximum income would be £100,000 x ({53/1,000} x 150 per cent) = £7,950 per year. Using the new tables, the maximum income would be £100,000 x ({50/1,000} x 150 per cent) = £7,500 per year. This is a difference of £450 per year or a reduction of 5.66 per cent.
In July and August 2014, the gilt yield was 3 per cent. Those facing a review in the early days of the new tables could well have been expecting to use a gilt yield of 2 per cent. They may now be faced with using a gilt yield of below 2 per cent, therefore facing a greater reduction than expected in their maximum income depending on their fund’s performance.
Sources
