Further funds can be added to the capped drawdown arrangement to allow the client to access further pension commencement lump sum (PCLS) and, importantly, take more income without triggering the Money Purchase Annual Allowance (MPAA).
The second scenario relates to those who may potentially have a lifetime allowance issue.
When the member reaches age 75 any funds in drawdown are tested against the lifetime allowance again.
At this point there is a “credit” for the amount of funds previously designated to drawdown and it is the growth that is tested.
Example
| Arrangement A | Arrangement B | |
| Fund value at age 75 | £10,000 | £1,000,000 |
| Amount originally put into drawdown | £110,000 | £900,000 |
| Amount tested against LTA at age 75 | - | £100,000 |
In the table above £110,000 was originally put into drawdown in arrangement A.
At age 75 this arrangement is now valued at £10,000 as income has been taken.
At age 75 benefit crystallisation test BCE 5A takes place.
The amount tested at this event (£10,000) is reduced by the amount previously crystallised (£110,000).
Where this produces a negative result (-£100,000) the amount tested is cancelled out, so no lifetime allowance is used.
However, when we look at arrangement B, the amount tested is £1,000,000 and the amount previously crystallised is £900,000, leaving £100,000 to be tested against the lifetime allowance at age 75. The fact that there is £100,000 “spare” in arrangement A is not relevant as each arrangement is tested separately.
Where there are potential lifetime allowance issues and multiple drawdown arrangements it is therefore important to consider which arrangement to crystallise into, and which arrangement to draw income from.
Statutory permissive override
When pension freedoms were introduced in 2015 there were many changes that needed to be made in a short space of time.
To help with this, legislation was put in place that meant any money purchase arrangement could offer the new types of pension payments without having to update their scheme rules.
This statutory permissive override can be found in Finance Act 2004 s273B and allows payments of drawdown pension for members, dependants, nominees and successors, along with other pension freedom payments.
This means any money purchase (defined contribution) pension scheme can designate funds to drawdown for the member, or on their death for their beneficiary, regardless of what is written in their scheme rules.
If the original scheme does not have the functionality to physically make the payments, then they only need to make the designation and then make a like-for-like drawdown transfer to a scheme that can facilitate the payments.
When the member dies benefits can be paid out as a lump sum, or under a money purchase scheme, be used to provide beneficiary’s drawdown for a dependant or nominee.
Where the drawdown option is chosen they must be designated to the beneficiary by the scheme administrator before they can be transferred – it is not possible to transfer the death benefits before they have been designated as you cannot transfer a deceased member’s fund.
