Pension payments are due to fall for retirement savers in capped drawdown.
HM Revenue and Customs (HMRC) has changed the underlying figures for calculating how much pension income these schemes pay in a year.
Capped drawdown is worked out on a formula that considers age, fund value and multipliers taken from actuarial tables published by HMRC.
The tables have changed for the first time in two years and mean pension incomes could drop by as much as 4% for retirement savers aged 65.
Other age groups are also impacted – but only by up to 2% a year.
HRC publishes new GAD tables
For example, if a 65-year-old retirement saver has a capped drawdown pension fund of £175,000, the maximum annual income for a tax year paid by the scheme is £13,912.
Under the new multipliers, the annual payment drops by £525 to £13,387.
The multipliers are taken from tables published by the Government Actuary’s Department and are called the ‘GAD tables’ in the financial world.
The tables took a lower limit of 2% for gilt yields, but this has been revised to zero for the new tables.
The income reduction applies to any capped drawdown pension coming up for review from April 6.
Capped drawdown mainly applies to pensions that paid an income without an annuity before pension freedoms started in April 2015.
Capped drawdown rules
Unlike an annuity, capped drawdown offers no guaranteed income and payments can rise and fall with the value of the underlying fund.
The payment limit is 150% of the income a healthy person of the same age as the retirement saver could expect an annuity to pay.
Capped drawdowns are reviewed every three years until the age of 75 and yearly after that. The maximum annual payment is worked against the prevailing GAD rates at the time.
Retirement savers in capped drawdown will continue to have their benefits calculated under GAD rules, while those going into drawdown after April 6, 2015 have other options.
For expats, some Qualifying Recognised Overseas Pension Scheme (QROPS) are capped drawdown products, so they will see their incomes affected from the start of the next tax year.
QROPS Information and Guidance
For more information about QROPS and the benefits it provides, download the iExpats QROPS Guide or complete the Get Advice form.
