Taking income under FAD will limit an individual’s annual allowance to £4,000, making them subject to the MPAA.
Capped drawdown
Although not available to those taking benefits for the first time after April 5 2015, additional funds can still be added to capped drawdown if it is already being used by an individual.
Capped drawdown does not come with the same flexibility as FAD because an individual can only draw up to a certain level of income. This is determined every three years based on the age of the individual, the size of the funds, a table provided by the Government Actuaries Department, and current 15-year gilt yields. If more than this maximum amount – usually referred to as ‘max gad’ – is drawn, then the fund will be deemed to enter FAD. One of the reasons individuals remain in capped drawdown is to avoid the MPAA.
It should be noted that the individual will have already triggered the MPAA if they have one plan in FAD and one plan in capped drawdown. If that is the case, they may wish to consider switching the remaining capped drawdown fund to FAD regardless. This may save charges in the long run.
UFPLS
The uncrystallised funds pension lump sum was a new introduction in 2015 with the pension freedoms. It gives greater options to those in schemes that did not offer drawdown. However, it has not had the kind of take-up that some may have anticipated.
As mentioned, UFPLS provides 25 per cent of the lump sum tax-free and 75 per cent of the lump sum taxed as income under PAYE. It is probably the more complex administration, and dealing with the taxation, that has put off many pension schemes from offering this option.
UFPLS is more popular in personal pensions that already offered drawdown before the freedoms. As with FAD, the fund will only last so long and this will be dependent on the same issues described earlier.
The benefit of UFPLS is that it is paid as a lump sum and the remainder of the fund in the pension will still be uncrystallised and available at a later date. This can be achieved through phasing FAD, but the paperwork may be simpler using an UFPLS.
Any payment of UFPLS will again make the member subject to the MPAA, limiting their annual allowance to £4,000 for money purchase pension schemes.
In some cases, the options at retirement will be limited because of the type of scheme or the plan’s rules. However, it is usually possible to transfer to another pension scheme if appropriate. Transfers from one type of pension plan to another can be complex, and advice should be sought to ensure that valuable benefits are not being given up for the perceived need of flexibility.
