This Newsletter concentrates on the new pension drawdown rules, still in draft form and with some grey areas only recently resolved, but coming into effect in only a few weeks' time. We set out the main rules and the effects they are likely to have in practice.

Our business continues to move forward strongly and we outline the current stage in our development. Finally, looking at a subject everyone is possibly getting a bit bored with, we set out some brief thoughts on FSCS levies and who pays them.

Understanding the New Income Drawdown Rules

The new drawdown rules take effect from 6 April, alarmingly soon given that they were not announced until mid December and the legislation is still in draft form. There has been limited time available to understand all the new rules and make plans for them.

Looking at an overview of the new rules, the main features are:

• The pension options are annuity, Drawdown Pension (replacing USP and ASP) or Scheme Pension throughout the entire benefit period, i.e. no need to change from one type of income to another at age 75.
• 55% tax on lump sums on death in drawdown, replacing the old rates of 35% pre 75 and up to 82% post 75. The 55% rate also applies after 75 on funds which are not in drawdown.
• Tax free lump sums can be taken after age 75, pension contributions can be paid after 75 but would not receive tax relief.

In other words, the "need to buy an annuity at 75" has disappeared, but age 75 itself has not completely disappeared from the rules.

Drawdown Pension comes in 2 forms, Capped Drawdown and Flexible Drawdown, and we look at Flexible Drawdown in more detail in a separate section of this Newsletter. Capped Drawdown is similar to USP, but with a few changes:

• The maximum each year is 100% of the GAD rate, not 120% (the minimum is still zero).
• There are new GAD tables and the rates are generally slightly worse, particularly for older males (with the recent EU ruling on sex equality, a further set of new unisex tables is likely as well).
• The rates will be reviewed every 3 years up to age 75, rather than every 5 years as currently. After 75 they will be reviewed annually as now, but based on actual age rather than the rate for a 75 year old as under ASP.

The new limits will generally apply to benefit crystallisations after 6 April and to existing pensions when they next come up for review. Generally this will be at the end of the current 5 year period, but transfers of drawdown cases after 6 April will trigger a review at the next pension anniversary date.

A pension calculation under the new rules could produce a much lower maximum pension than under current rules. The combination of the 120% limit reducing to 100%, the new GAD tables, and for existing drawdown a possibly lower gilt yield in the GAD table than previously, could result in the maximum being 25% or more lower. Not everyone wants to take the maximum pension but, for those who do, attention has focussed on ways in which the current rules can be extended beyond 6 April.

For those in full drawdown, the scope is very limited. A pension review can be carried out during an existing 5 year drawdown period, and this sets a new maximum pension for a new 5 year period, but the review can only be carried out on an anniversary date and only if requested in advance of that date. As a result, this option for setting a new 5 year period is only available for those with anniversary dates between now and 6 April. Otherwise, the new rules will apply when someone's current 5 year period comes to an end.

For those who are not in drawdown but planning to take benefits within the next few years, they should consider starting drawdown before 5 April, to produce a maximum pension at the 120% level for a 5 year period, rather than waiting till after 5 April and having the 100% limit.

This applies to phased drawdown as well, for those in single arrangement * plans (see the definition below). If these are put into phased drawdown before 5 April, this starts a 5 year period at the 120% level, and further drawdown after 6 April will trigger a review of the pension on the new GAD tables, but still at the 120% maximum with the 5 year period remaining intact. In theory just £1 could be crystallised before 5 April to qualify for this.

In practice there is very limited time available to plan for all these changes, and some providers may not have the systems in place to cope with last minute planning. Looking beyond 6 April, what effect are the new rules likely to have? We look at the opportunities from Flexible Drawdown separately in this Newsletter, but for drawdown in general we think the following may happen:

• Up to now there has been a feeling that it makes sense to maximise the extraction of funds from a pension, to minimise the remaining funds potentially subject to 82% tax on death. With this rate coming down to 55%, which is not much more than the top rate of income tax, we may see reduced drawdown and more funds remaining in a tax exempt pension fund, to be paid out on death.
 
• Although tax free lump sums can now be taken after age 75, there seems little point in doing this, as if death occurs before the lump sum is drawn then it is effectively taxed at 55%.

Further opportunities may become apparent as the new rules take effect. One thing is certain, those advisers and providers who understand all the rules and have the capability to deal with them should continue to see demand for their services.

*providers will operate either single arrangement plans or segmented plans. In a single arrangement plan, phased drawdown starts a single 5 year benefit period. Each time further drawdown takes place, the whole pension is reviewed but the 5 year period remains unchanged.

In segmented plans, each new drawdown starts its own separate pension period and a new drawdown after 6 April would be a new 3 year period with a 100% upper limit. Our own SIPP is a single arrangement plan.   

Flexible Drawdown and Scheme Pensions

The possibility of using Scheme Pensions in SIPPs and SSASs as one of the components of a Flexible Drawdown arrangement is attracting a lot of attention. How would this work in practice?

A couple of definitions first of all:

Flexible Drawdown

This is a new type of income drawdown from April 2011, allowing anyone in receipt of a Minimum Income Requirement (MIR) of at least £20,000 p.a. to take the rest of their pension fund as and when they choose. The MIR can include State pensions, lifetime pension annuities (not purchased life annuities or temporary annuities) and Scheme Pensions.

Scheme Pensions

These can be thought of as "annuity paid as income drawdown". The pension is individually calculated, not based on a GAD table, and must be paid at the full fixed rate for the balance of the person's lifetime. It can be reviewed periodically, and if necessary adjusted, but the expectation at the outset is that it is a fixed payment for life.

Scheme Pensions have up to now been used mainly as an alternative to ASP beyond age 75, as they provide a full income, instead of ASP which was at a restricted level. "Family SIPPs" have developed as a product through which these Scheme Pensions can be provided.

With the demise of ASP, Scheme Pensions now seem set to be used for a different purpose, namely as a component of the MIR, and these could lead to them taking a bigger role in pension planning. The attraction for many clients will be the ability to meet the MIR whilst retaining the funds in their SIPP or SSAS, rather than using the funds to buy an annuity. Whilst an annuity purchase might be the right choice for many clients, SIPP and SSAS clients want to retain control of their funds and are mostly averse to buying annuities.

Looking at a case study of how it would work in practice, take a 65 year old with a SIPP with funds of £400,000 after taking tax free cash, and State pensions totalling £9,000 p.a. and no other income. Normal capped drawdown would produce a maximum pension of around £27,000 p.a. under the new rules, but they would like to draw more to take advantage of their basic rate tax band. 

They decide to use part of their SIPP to provide a Scheme Pension of £11,000 p.a., which together with State pensions meets the £20,000 MIR. The Scheme pension is calculated to cost £175,000, leaving funds of £225,000 in the SIPP which can be used for Flexible Drawdown. They decide to draw from this at the rate of £20,000 p.a., giving a higher total income of £40,000 p.a. 

This is an example of a way in which Scheme Pension can be used to produce an outcome which meets the client's objectives. Some clients may decide that they want to use Flexible Drawdown to extract funds from their pension as quickly as possible - in the above example the whole £225,000 could be paid in one sum, though part of it will be taxed at the new top rate of 50%. Used in this way, it is hard to see that Flexible Drawdown makes financial sense, but there will be some situations like the case study above where Flexible Drawdown can be used as a sensible alternative to Capped Drawdown, and Scheme Pensions are likely to play an important role in this.

It is worth remembering that the new drawdown rules are still draft legislation at this stage. Some have questioned whether HMRC really intended Scheme Pensions in SIPPs and SSAS to be used as a component of the MIR. This will become clearer when the legislation is enacted in final form and hopefully we can then start to make more detailed plans for putting this into practice.

Our Client Book hits the 1,000 level

In fact our total SIPP and SSAS numbers went above 1,000 a while ago, but we have been too busy to make a fuss of it. Nevertheless, we regard it as a good achievement for a firm which has been trading for not much more than 18 months. In addition, we have achieved month on month sustained profitability for some months now, and profitability will increase as client numbers go up.

These are important milestones for us in our business development and the many positive testimonials we are receiving from advisers and clients are confirming that we continue to maintain high service levels as our business grows. We are taking on significant new business introducers and this process will continue as we become a more established presence in the marketplace.

Anyone who has been thinking of using our services but has been cautious about using a new company may feel that now is the right time to approach us. If you are already doing business with us, we are very grateful for your support, but if you know anyone who is unhappy with their current SIPP provider, why not put them in touch?

FSCS Levies and SIPP Operators

Is it just SIPP Providers that seem to be talking about the possibility of passing on the FSCS levy to clients? We haven't seen it being reported for financial firms in other sectors.

We can understand the arguments for asking the clients to pay, and the unfairness of asking product providers to pay for something which was nothing to do with them, but the bad publicity generated for the providers concerned makes us wonder whether it made sense for them to take this stance.

Several advisers have asked us whether we will amend our terms of business to allow us to take levies like this from the client and we have confirmed that we have no plans to do this. Like most financial firms, we expect to be grumbling about the injustice of it all, but putting our hands in our pockets and paying up. Asking a client to pay an unexpected bill in the future simply results in aggravation for the adviser from an unhappy client and we have no intention of causing aggravation for our introducers, from FSCS levies or anything else for that matter.