Flexi Vs Capped
What should I consider when moving from Capped Drawdown to Flexi Access drawdown?
If you went into drawdown prior to 6th April 2015 you would have taken your benefits under Capped Drawdown. This meant that a calculation was completed on your pension pot to tell you how much income you could withdraw each year. You could take less than the maximum but not more. You can remain in capped drawdown as long as you don’t breach the maximum income level or you can elect to move to Flexi Access.
In Flexi Access you are in full control of how you access your pension pot. You can with draw income without worrying about a maximum limit of income each year. If you feel that in Capped Drawdown you require more income then Flexi Access will allow you to withdraw more.
Depleting your pension Pot
The danger of being in control of the amount of income you withdraw under Flexi Access is the affect on your pension fund to support your chosen level of income in the long term. Will your funds be replenished through Growth and Income of your chosen investments? Under Capped Drawdown the prescribed formula to work out the basis income came out similar to what could be provided from an annuity. The basis amount could be multiplied by 150% to give a higher income than Annuities.
Under Capped Drawdown benefit reviews are carried out on your pension pot every 3 years if you are under 75 and every year once over age 75. The benefit reviews will recalculate your maximum amount of pension income you can take each year. This could mean a lower income that would come into affect immediately (also see charges section below). In Flexi Access you will not receive any benefit reviews which means income levels can remain constant (as long as your pension fund permits).
Capped Drawdown Calculations changes
The prescribed HMRC formula for calculating maximum income has changed from 1st July. The impact could mean lower maximum incomes at the next benefit review. This is down to the 15 year gilt rate used to calculate capped drawdown reviews was previously capped at a minimum of 2%. From July 1, 2017 this will be removed and lower rates can be used. Due to this removal the figure that was used for July 2017 benefit reviews was 1.5% instead previously used 2%.
In a previous blog we have discussed the impact of the changes.
Trigger the Money Purchase Annual Allowance (MPAA)
You will trigger the MPAA the first time you withdraw income from your pension fund while under Flexi Access. The MPAA caps the amount of money at £4,000 that can be contributed into a pension scheme. Anything over this amount will create a tax charge at your marginal rate. The MPAA applies to all of your money purchase pension schemes. Will this affect future contributing plans?
Check your pension provider’s charges. Historically the charging structure for capped drawdown polices are complex. Extra charges can be levied for certain events
• Each benefit review (normally every 3 years and the yearly from age 75)
• Payroll charge to take income
Check these charges over a 3 year period against Flexi Access charges. Which one is the most cost effective ?
Hartley Pensions have kept the charges for Flexi Access and Capped Drawdown the same for both drawdown options. See our charges here
How do I change from Capped to Flexi Access
You must make an election to move from Capped Drawdown to Flexi Access. This means the pension provider will want it in writing. To make this easier we have created a form for you to complete that is held within our Literature section of our website, called Capped to Flexi.