RPSM03101040 - Technical Pages: Protecting pension rights from tax charges: Valuing pension rights at 5 April 2006: Crystallised rights - income drawdown

Crystallised rights: income drawdown

If the individual has ’relevant existing pensions’ that are being paid under income drawdown from

• a retirement benefit scheme or
• a deferred annuity contract (section 32 policy)

the annual rate at which the pension is payable on 5 April 2006 is to be taken to be the maximum that could be drawn as income from the pension scheme or contract concerned - the actual drawings are not material.

Example 1

An individual is drawing a pension of £5,000 under drawdown, but the maximum annual rate of this pension is £10,000. The value of the crystallised rights in these circumstances is £250,000 (25 x £10,000 = £250,000).

Example 2

Alan had a fund of £1.6 million. He took a lump sum of £400,000 in January 2006. From the remaining fund of £1.2 million he takes a pension of £91,200 a year under income drawdown. This is the maximum pension that could have been taken under income drawdown. (Alan is assumed to be age 60 and gilt yields are assumed to be 4.5% per annum.)

Alan’s pension is therefore valued at £2,280,000 (25 x £91,200 = £2,280,000).

There is no requirement to perform a valuation/review as at 5 April 2006 to determine the maximum amount of pension payable. The maximum amount determined by the most recent valuation/review may be used.

The same principle applies in the case of an individual taking income withdrawal from a personal pension scheme. The crystallised value will be 25 times the maximum amount that could be taken as income drawdown on 5 April 2006. It is not 25 times the amount of income actually being drawn.