If the maximum capped drawdown amount is exceeded, the capped drawdown fund will automatically be converted to a flexi-access drawdown fund and as such future defined contribution pension contributions will be liable to the MPAA. For clients under 75 the income cap is calculated every 3 years under the reference period rules. Flexi-access drawdown Flexi-access drawdown pension replaced flexible drawdown on 6 April 2015 and I’m sure you are all very familiar with it. It can provide great flexibility in terms of how the income is taken but of course where an income is being drawn, this is a trigger event for the money purchase annual allowance. Short term annuities If the client wanted to secure some income, then annuities clearly have a role to play. If this was being done on a temporary basis then the use of short term annuities may be appropriate as they can be used in combination with both flexi-access and capped drawdown, so it makes sense to cover them here. Instead of drawing an income directly from the drawdown funds, drawdown funds can be used to purchase a shortterm annuity to provide the required level of income. Short-term annuities can be purchased from an insurance company and the term can’t exceed a maximum of five years, and pays a set amount over the set period. However, once a short-term annuity has been purchased the income amount can’t normally be changed. So the point to note is that if arranged in connection with a capped drawdown case, the total amount of income payable from short-term annuities and drawdown mustn’t exceed the maximum income defined by GAD. As covered earlier a review must take place every three years and a short-term annuity may last for a maximum of five years, so there can be an issue if the maximum drawdown reduces in the middle of the term of the short-term annuity and any excess income would be an unauthorised payment and force the plan to be switched into a flexi access arrangement and once again trigger the MPAA. Uncrystallised fund pension lump sum Utilising uncrystallised fund pension lump sum is another method to take an income from the pension and was introduced to give greater flexibility in retirement benefit choice to clients. The key point again to remember is that using this method is also a trigger event for MPAA. Withdrawal Strategies Turning to withdrawal strategies, the point was made that several different strategies may be used at different points in the retirement journey. A further summary of the principle strategies was provided in the RIAAT guide (not an exhaustive list). Again none of these strategies will be alien to you, the point to consider is how the strategy is supported and evidenced within your process. Sustainable withdrawal rate strategy This aims to set a fixed level of withdrawals (possibly subject to adjustment for inflation) to enable the client to make withdrawals from their pension every year over the course of their retirement, or over a set period of time, without running out of money. It is based on the assumption that a client should only withdraw a relatively small percentage of their pension portfolio every year. Care should be taken to evidence what is reasonable and justifiable based on client’s position. Natural income or natural yield strategy This involves the client holding income-generating assets and living off the income or dividends produced. In theory this should preserve the capital invested in the assets (at least in the sense that the client is not withdrawing capital; the capital value may still fluctuate). So long as the income produced meets the client’s needs and objectives, fluctuations in the capital value are less important. This assumes the client has the required risk tolerance to “ride out” these capital fluctuations. Consideration also needs to be given to the impact of ongoing costs on this strategy and whether they reduce the level of income provided, or reduce the capital. Multiple pots strategy Involves a client investing money in a variety of assets to manage long-term investment risk. For example, the client may invest 10% of their retirement savings in cash or cashlike assets to cover 2 years of income, with the remainder invested in longer-term growth assets (e.g. bonds, equities, property, etc). These strategies may involve more than two investment ‘pots’. The point is to manage risk, so that the client does not have to withdraw from equities to fund income at a point when equity markets are low. By holding a buffer of cash assets, the client can withdraw from these instead of equities and wait for the markets to pick up again. Bridging strategy Whereby a client takes short-term withdrawals from their retirement savings to ‘bridge’ until a later date when another income becomes payable – typically this is a secured income when the client becomes eligible to receive their state pension, or when a DB pension becomes payable. 6 Income Drawdown
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