RPSM09103550 - Technical Pages: Member benefits: Drawdown pension: Reviewing the maximum capped drawdown pension pre age 75
This guidance has been written from the members’ perspective.
Capped drawdown pension: Reviewing the maximum annual amount before age 75
How often does my pension scheme calculate my maximum drawdown pension?
How does my pension scheme recalculate my maximum drawdown pension at the start of a new reference period?
Can I ask for an earlier review of my maximum drawdown pension, i.e. can I change my reference period?
How often does my pension scheme calculate my maximum drawdown pension?
[Para 10 Sch 28]
This depends on how old you are.
When you are 75 or over your maximum drawdown pension must be recalculated every year, at the start of your pension year.
When you are under 75 your maximum drawdown pension is usually recalculated every three years, starting from when you first designated funds into drawdown pension. This three year period is called a ‘reference period’. Certain events can cause your reference period to change. At the start of a new reference period the maximum amount of your drawdown pension must be recalculated.
Find out more about reference periods and when they can be changed at Can I ask for an earlier review of my maximum drawdown pension, i.e. can I change my reference period?
There are other events that will trigger a recalculation of your maximum drawdown pension. But these events will not change your reference period - see RPSM09103570 for more information.
How does my pension scheme recalculate my maximum drawdown pension at the start of a new reference period?
[Para 10 Sch 28]
Your pension scheme administrator will need to recalculate your maximum pension
- if you are under 75 at the start of every new reference period,
- if you are 75 or older, annually, at the start of every pension year.
Your scheme administrator recalculates your maximum drawdown pension in the same way as they worked out your original maximum drawdown pension (see RPSM09103540). However this time your scheme administrator can carry out the calculation of the maximum drawdown pension on any day in the period of 60 days ending on the new reference date. So if your new reference period starts on 1 July 2015 your scheme administrator can carry out the maximum drawdown pension calculation at any time from 3 May 2015 to 1 July 2015. The date chosen by your scheme administrator is called the ‘nominated date’. It is your scheme administrator who chooses the nominated date - not you although they may give you an option to choose.
The scheme administrator works out your basis amount using
- your age on the nominated day
- the value of your drawdown pension fund on the nominated day, and
- the 15 year UK gilt yield for the 15th day of the month before the nominated date.
Example
Elaine originally designated £150,000 into drawdown pension on 1 September 2011. Her reference period for calculating her maximum capped drawdown pension ends on 31 August 2014.
Elaine’s scheme administrator needs to work out the maximum amount of drawdown pension Elaine can take each year starting from 1 September 2014. This is the start of her new reference period.
Elaine’s scheme administrator can carry out the calculation of the maximum drawdown pension on any day in the period of 60 days ending on the new reference date. This means that the calculation can be done on any day in the period starting on 4 July 2014 and ending on 1 September 2014. The date the scheme administrator uses to do the calculation is called the ‘nominated date’. Whatever date is chosen as the nominated date Elaine’s reference date is 1 September and her new reference period will start on 1 September 2014.
To work out the maximum pension Elaine can have, her scheme administrator needs to know
-
- how old Elaine is on the nominated date
- the yield on 15 year UK gilts from the FTSE UK Gilt Indices on the 15th day of the month before the nominated date, and
- the value of Elaine’s drawdown pension fund on the nominated date.
Elaine’s scheme administrator chooses to use a nominated date of 31 July 2014. Elaine is 61 on 31 July 2014 and the value of her drawdown pension fund on that day is £145,000. The scheme administrator looks up the 15 year UK Gilt index for 15 June 2014. Assume this is 4.25 per cent.
Using the male GAD tables (see RPSM091035400) this gives an amount of £62 pension per £1,000 drawdown pension fund. Elaine’s new maximum pension is £8,990 (145,000/1,000 x £62 = £8,990). This new maximum drawdown pension will take effect from the start of Elaine’s new reference period on 1 September 2014.
Can I ask for an earlier review of my maximum drawdown pension, i.e. can I change my reference period?
[Para 9 1 Sch 28]
If you are under 75 the maximum amount of drawdown pension you can take each year is set for a period of three years. This period of time is called your ‘reference period’. Each time you start a new reference period the maximum amount of your drawdown pension will be recalculated.
Your reference period does not have to last for three years. You can reduce but not extend the length of time of your reference period. You can also only start a new reference period at the end of your current pension year. For example if your reference period is due to run from 1 November 2011 to 31 October 2014 you could only start a new reference period on 1 November, in this example either 1 November 2012 or 1 November 2013.
To change your reference period you must ask your scheme administrator before the end of your current pension year. Your scheme administrator also needs to agree to your request. If your scheme administrator agrees to your request (and they don’t have to) your new reference period will start the day after the end of your current pension year.
Your scheme administrator cannot change your reference period unless you have asked them to do so.
Example
John designated benefits into drawdown pension on 1 May 2012, when he is age 65. His reference period is due to run from 1 May 2012 to 30 April 2015 with his pension years running from
John’s pension fund has performed very well since he first went into drawdown pension. He wants to take a bigger pension. To do this John needs his scheme administrator to recalculate the maximum amount of pension he can take (the basis amount). As nothing else has happened that could trigger a recalculation of his basis amount John needs to start a new reference period.
On 6 April 2014 John asks his scheme administrator to end his reference period at the end of his current pension year, which is 30 April 2014. John’s scheme administrator agrees to his request. John’s reference period ends on 30 April 2014. His new reference period starts on 1 May 2014 made up of the following pension years
| Glossary (RPSM20000000) |
