Pensions - Articles - HMRC u-turn on drawdown transfers will be a damp squib


 In April 2011 HMRC changed the rules relating to the calculation of the maximum annual income for pension income drawdown arrangements and how often the calculation would automatically be reviewed.

 The Government has now decided to make a u-turn on this earlier change, to allow clients in a 5 year review period to retain their current maximum annual income for the remainder of their statutory review period if they choose to transfer their drawdown fund. Skandia believes this move will be nothing more than a damp squib, as the number of clients impacted will be minimal, and the difference in income levels is likely to be minor.

 The number of clients impacted by this change is limited to those who went into drawdown between April 2010 and April 2011*. Of this segment of clients, some will see no significant difference in their income level as a result of this u-turn, and many could in fact be worse off.

 Females, for example, who will benefit from gender neutrality improvements in income factors when their income is next reviewed, may see a rise in their maximum income level if they are able to review income earlier, so the u-turn potentially puts them in a worse position if their new provider does not offer an annual rebasis review facility.

 For those clients where the u-turn results in a significantly higher level of income being maintained for a longer period, the u-turn is not solving a problem, instead it is making it worse. The major reason for a significant fall in income by reviewing it earlier is due to one thing - capital erosion of the drawdown fund. This could be due to a combination of stock market volatility and withdrawals being taken at a level that the underlying investment portfolio cannot sustain. The U-turn proposed by HMRC does not solve this longer term income problem for clients, it simply defers addressing this issue for a period of between 1 to 2 years, depending on when the client went into drawdown.

 Arguably the u-turn could compound the longer term issue if the capital erosion gets worse over that period. This could create a knife edge position when the next statutory review point comes, resulting in some clients potentially suffering an even greater fall in income levels than would be the case if there was no change to the current rules.

 Adrian Walker, pension expert, comments:

 “The u-turn proposed by HMRC has come out of nowhere, with no real time for industry consultation. This is being positioned as a great solution for clients who want to transfer from their existing provider but for many, the current rules would not be an inhibitor to do so.

 “Any client who would see significant benefit from this change of policy in the short term should review their pension income strategy anyway, as they are likely to be in a situation where their maximum income will reduce significantly at a later date, a situation that could magnify the longer the current income levels continue.”

 *Clients not impacted by the u-turn are:

 Clients who went into drawdown pre April 2009 or post April 2011 will now be on a 3 year review period anyway so are not impacted.

 Clients who went into drawdown between April 2009 and April 2010 will, over the next 12 months fall into the last year of their current review period, so will be able to maintain their current maximum annual income until the next statutory review comes into effect (provided they delay transferring until the start of that last scheme income year).

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