Should scheme pension be an option for capped drawdown clients?

Carl Lamb gives seven reasons why capped drawdown members and IFAs need to consider scheme pension

1. The GAD Yield for capped drawdown fell to a mere 2.75% for October. This means clients that entered an unsecured pension (USP) or alternatively secured pension (ASP) - that are now by default in capped drawdown - will receive a 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 in April from 120% to 100%, a repricing downwards of the GAD tables on 6 June, and falls in the ­underlying portfolios of plenty of clients over the past five years.

2. This will only get worse as quantitative easing 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.

3. 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.

4. 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 there is no adverse health now, there will be later, so income can be reviewed and increased as health changes if required (unlike in capped drawdown).

5. A scheme pension can have a ten-year guarantee. This is more tax efficient than capped drawdown as death ­benefits can be taken as income for up to ten years by someone who pays 20% tax, 40% tax, or none (­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 (i.e. can be left to a spouse or ­financial dependant - usually the SIPP member's child, but they have to be aged under 23).

6. Taking income from a pension is ­better than the lump sum. This is because 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 pays 20% tax, 40% tax or none at all. 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.

7. 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.

Carl Lamb is managing director of Almary Green