In all the hype over the new pensions rules and flexibility beginning next April, it is easy to miss the rules concerning contribution allowances whilst in drawdown.
There can be reasons and/or advantages to an individual in running a drawdown arrangement and taking income from it whilst simultaneously making contributions (or keeping the option to make future contributions). Care needs to be taken not to fall foul of rules prohibiting the recycling of tax-free cash.
Existing capped drawdown plans which are maintained within their GAD withdrawal limits will retain the annual allowance for further contributions of £40,000, whereas an active flexible plan will have a reduced allowance of £10,000 after April 5th 2015. However, capped Drawdown will no longer be an option after April 2015, when all new drawdown plans will qualify as “flexible” regardless of withdrawal levels. After April 5th, as soon as a “trigger” event occurs, such as taking income or cashing in a small pension in its entirety, the new reduced annual allowance of £10,000 applies.
So, investors wishing to carry on an active drawdown arrangement yet take advantage of the £40,000 contributions limit in future, who do not currently have such a plan, would need to quickly set up a plan (and make a crystallisation event – e.g. a small withdrawal of tax free cash) prior to April 2015, to be able keep that greater level of annual contribution allowance.
To maintain the £40,000 limit going forward, capped drawdown members must not exceed their GAD income limits in any tax year. To do so creates an event which triggers the smaller contributions allowance going forward.
This is an area where financial advice is essential – in fact drawdown plan providers will generally only deal with you through an adviser(!)
Most new drawdown plans are initiated via a transfer of existing pension money from one or more other pension plans, but in view of the rapidly closing window (realistically you’d need to get a new application in by around March 20th at the very latest), for a capped plan I would suggest the time for that is already past. However, if you have a reasonable cash lump sum which you can contribute now, then it may still be possible to find a capped drawdown provider and set the account up with instant crystallisation.
NB the above is a brief summary only – we will advise on pertinent rules as appropriate. If you think this sounds suitable for you, we’re happy to advise further – just give us a call on 0345 013 6525 to discuss.