The transfer of drawdown funds changed significantly with the introduction of the Taxation of Pensions Act 2014.
There are now various types of drawdown funds, including:
- member's drawdown pension fund (Capped drawdown established before 6 April 2015)
- dependant's drawdown pension fund (from a Capped drawdown
established before 6 April 2015)
- member's flexi-access drawdown fund
- dependant's flexi-access drawdown fund
- nominee's flexi-access drawdown fund
- successor's flexi-access drawdown fund,
In respect of a Capped drawdown fund established prior to 6 April 2015 a transfer from that arrangement (“the old arrangement”) to a new drawdown arrangement can only take place if all of the sums/assets become held under a new drawdown arrangement that holds no other sums or assets ("the new arrangement"). If this is not the case, the transaction is not a recognised transfer.
Essentially this means, whilst it is possible to use part of a drawdown fund to buy a lifetime annuity or scheme pension, it is not possible to transfer part of an existing drawdown arrangement to a new drawdown arrangement. This legislative requirement applies to all types of drawdown transfer (ie capped, dependant’s, flexi-access etc listed above).
NB although some schemes may create several drawdown “arrangements” for the same client, perhaps through phased retirement transactions, they may apply stricter rules, eg their plan conditions may state all of a member’s drawdown plans and arrangements held in their scheme must be transferred out at the same time and to the same pension scheme.
Where the sums/assets are transferred to such a new arrangement, they are treated as remaining under the original arrangement on a "like for like" basis.
For example if a Capped drawdown is transferred it must be transferred to a new Capped drawdown arrangement, the new arrangement will be treated as if they had remained within the old arrangement for the purposes of:
- determining the pension year,
- determining the GAD review dates, and
- the annual amount of the relevant annuity (Max GAD)
Therefore, sufficient information (e.g. maximum pension, review dates etc) has to be obtained/provided in the case of an existing drawdown member transferring into another drawdown contract. See our Drawdown article for more on drawdown transfers.
In respect of Capped drawdown (plans arranged prior to 6 April 2015), if requested by the member or if the max GAD limits are breached, the plan will be converted to a flexi-access drawdown arrangement. The above also applies to dependant’s drawdown.
Finance Act 2004 Sch 28, Part 1 ss8
Finance Act 2004 Sch 28 Part 2 para 22
The member is not subject to a BCE in relation to the new drawdown arrangement nor are they entitled to any further PCLS. The provider would want to know details of the benefit crystallisation event, being the percentage LTA used and the amount that crystallised under BCE1. If the member subsequently purchases a lifetime annuity, scheme pension, or transfers to a Qualifying Recognised Overseas Pension Scheme (QROPS) a BCE 2, 4 or 8 is triggered, which is reduced by the amount previously crystallising under BCE1.
Further information on the LTA aspects of drawdown are in the Lifetime Allowance article.
Section 169(1) of Finance Act 2004