Why you should consider scheme pension for capped drawdown clients

Carl Lamb highlights the reasons why capped drawdown clients could benefit from scheme pension

• The GAD yield for capped drawdown has fallen to a mere 2.75% for October which means clients that entered unsecured pension (USP), alternatively secured pension (ASP) that are now by default in capped drawdown will receive a significantly lower income when their next five year review takes place. We also have a perfect storm in the drawdown market as this was coupled with a decrease in the maximum income limit from 120% to 100% in April, a repricing downwards of the GAD tables on June 6th and falls in the underlying portfolios of a lot of clients over the past five years.

• This will only get worse as quantative easing (QE) drives the yield down further in forthcoming months. Solvency II and unisex pricing will compound the problems pension scheme members will face with capped drawdown and reduce income levels further

• A scheme pension actuary will use a higher investment assumption than the 2.75% GAD yield as it is scheme specific and based on an individual's health, age, sex and scheme assets

• This means income levels are higher than for capped drawdown at all ages even for someone in good health. If there is adverse health then income levels will be even higher. Even if no adverse health now there will be later so income can be reviewed and increased as health changes if required (unlike in capped drawdown).

• A scheme pension can have a 10 year guarantee. This is more tax efficient than capped drawdown as death benefits can be taken as income for up to 10 years by a 40%, 20% or even non taxpayer (including partner, children or grandchildren). This is superior to capped drawdown where death benefits are hugely restrictive in terms of who they can be paid to (can only be left to a spouse or financial dependent -usually the SIPP member's child but has to be under 23).

• Taking income from a pension is usually better than the lump sum as the increase in lump sum death tax to 55% before age 75 in April made the higher income from scheme pension preferable to capped drawdown even for a 50% taxpayer but especially for a spouse or family member who is a 20%, 40% or better still non tax-payer. Even if income is not required it may be better to maximise income as a lower tax rate on income and gift under the gifts out of surplus income rules (not a potentially exempt transfer) if done and recorded annually

• As a secure income scheme pension can also avoid the retest against the lifetime allowance at 75 again saving pension scheme members vast sums of money

• Unlike capped drawdown you don't need to have annual reviews after age 75.

Carl Lamb is managing director of Almary Green