RPSM10104890 - Technical Pages: Death benefits: Pensions: Dependants' drawdown pension: Dependants’ capped drawdown: Maximum annual amounts
The following guidance has been written from the dependant’s perspective
Dependants’ capped drawdown pension: Maximum amount of capped drawdown
How much can I take as dependants’ capped drawdown pension?
What is the maximum amount of my dependants’ drawdown pension?
How does my pension scheme administrator work out my maximum dependants’ drawdown pension when I first get it?
If I take less than the maximum amount in one pension year, can I take the balance in a later pension year?
How much can I take as dependants’ capped drawdown pension?
| [s167 Pension death benefit rule 4] |
There is no minimum amount that you have to take each year. However there is a maximum amount that you can be paid each year as dependants’ capped drawdown.
The amount of dependants’ capped drawdown you can have from a pension arrangement is limited to the maximum dependants’ drawdown pension for the arrangement less the amount of any dependants’ short-term annuity paid from the same arrangement.
Example
Adam has designated £400,000 into dependants’ drawdown pension. His scheme administrator has worked out that the maximum drawdown pension Adam can have each year is £22,000. Adam used funds from his dependants’ drawdown pension fund to buy a dependants’ short-term annuity. He is paid £4,650 from the dependants’ short-term annuity each year. This payment of the dependants’ short-term annuity reduces the amount of dependants’ drawdown pension Adam can be paid as income withdrawal. The maximum income withdrawal on top of the dependants’ short term annuity Adam can have each year is £17,350 (£22,000 - £4,650 = £17,350).
To find out how your scheme administrator calculates your maximum drawdown pension see How does my pension scheme administrator work out my maximum dependants’ drawdown pension when I first get it?
What is the maximum amount of my dependants’ drawdown pension?
| [s167 Pension death benefit rule 4] |
The maximum amount of dependants’ drawdown pension that a pension arrangement can pay each year is 100 per cent of an equivalent annuity that could be purchased with your dependants’ drawdown pension fund. This annuity equivalent is known as ‘the basis amount’. Your scheme administrator calculates the basis amount. The tax legislation specifies how they should do this.
To read more about how your scheme administrator works out your maximum drawdown pension see How does my pension scheme administrator work out my maximum dependants’ drawdown pension when I first get it?
The maximum amount of your dependants’ drawdown pension is measured over a ‘pension year’. A pension year for an arrangement runs for 12 months from the date you first designate funds to provide dependants’ drawdown pension under the arrangement. Each following pension year follows this date. Once set you cannot change a pension year before you are 75. In limited circumstances a pension year can be changed after reaching age 75.
Example
On 1 October 2011 Harry designates £100,000 to provide a dependants’ drawdown pension. Harry has not previously drawn any benefits from this arrangement. This first designation of funds into dependants’ drawdown pension sets Harry’s pension years. Harry’s pension years are as follows
1 October 2011 to 30 September 2012 (the first pension year)
1 October 2012 to 30 September 2013 (the second pension year)
1 October 2013 to 30 September 2014 (the third pension year) and so on.
How does my pension scheme administrator work out my maximum dependants’ drawdown pension when I first get it?
| [Para 24 Sch 28] |
To work out your maximum dependants’ drawdown pension your scheme administrator needs to work out your basis amount. This is because your maximum drawdown pension is 100 per cent of your basis amount.
A scheme administrator must work out your basis amount by using tables specifically prepared for this purpose by the Government Actuary’s Department (GAD). These GAD tables are published on the HMRC website with full instructions on how to use them. There are three GAD tables, these are for
- men aged 23 or over
- women aged 23 or over, and
- anyone aged under 23.
However, following the issue of an EU Gender Directive, from 21 December 2012 your scheme administrator should use the GAD table for men to obtain the relevant annuity rate if you are a woman in any of the following circumstances:
- you are aged over 23 with a reference period starting on or after 21 December 2012 (including when the nominated period is before that date),
- you are aged 75 or over with a drawdown pension year starting on or after that date (including when the nominated period is before that date), and
- you are aged over 23 and your basis amount needs recalculating following one of the events described at RPSM09103570 occurring on or after 21 December 2012.
The GAD tables tell you how much of an equivalent annuity £1,000 of your dependants’ drawdown pension fund will buy.
To see a copy of the GAD tables that should be used to calculate your basis amount see http://www.hmrc.gov.uk/pensionschemes/gad-tables.htm.
To calculate the basis amount from the GAD tables your scheme administrator needs to know
- the date of the calculation. When you first get a dependants’ drawdown pension from an arrangement this is the date you designate funds into drawdown pension.
- the value of your dependants’ drawdown pension fund on your calculation date
- how old you are on the calculation date, and
- a gilt yield for 15 year UK gilts from the FTSE UK Gilt Indices. This figure needs to be for the 15th day of the month before the calculation date. So if the calculation date is 20 October the scheme administrator needs the yield percentage for 15 September. If the 15th is a non-working day the scheme administrator needs to go back to the nearest working day before the 15th.
The following example shows how your scheme administrator calculates your basis amount and so your maximum dependants’ drawdown pension.
Example
On 1 September 2011 Elaine tells her pension scheme administrator that she is designating £150,000 into dependants’ drawdown pension. This is the first time she has taken benefits from the scheme.
Elaine’s scheme administrator has to work out the maximum dependants’ drawdown pension Elaine can have. They know the date of the calculation is the date Elaine designated funds, i.e. 1 September 2011. They also know the value of the dependants’ drawdown pension fund on that day was £150,000.
Elaine’s maximum dependants’ drawdown pension will be 100 per cent of the ‘basis amount’. So Elaine’s scheme administrator needs to calculate the ‘basis amount’ for Elaine. To do this they need to know
-
- how old Elaine is on 1 September 2011, and
- the yield figure on 15 August 2011 for 15 year UK gilt from the FTSE Gilt Indices.
The scheme administrator needs this information so that they can find Elaine’s basis amount using the 2011 GAD tables
Elaine is 58 on 1 September 2011 and the 15 year UK gilt yield percentage on 15 August 2011 is 4.15 per cent. This yield figure needs to be rounded down to the nearest 0.25 per cent. This gives a yield figure of 4.00 percent for the calculation of the basis amount.
Using the 2011 GAD table for women aged 23 and over the scheme administrator looks up the amount for a 58 year old and a gilt yield of 4 per cent. This shows an annuity equivalent of £55 pension per £1000 of dependants’ drawdown pension fund.
Elaine has a dependants’ drawdown pension fund of £150,000. This means Elaine’s basis amount is £8,250 (150,000/1,000 x £55 = £8,250).
The maximum dependants’ drawdown pension Elaine can have for each pension year is £8,250. Her pension years run from 1 September to 31 August.
If I take less than the maximum amount in one pension year, can I take the balance in a later pension year?
| [s167 Pension Death Benefit Rule 4] |
No, not under ‘capped’ drawdown.
| Glossary (RPSM20000000) |
