Clarification on mergers and transfers
There are three key points to bear in mind in respect of drawdown arrangements.
Where a member is still in capped drawdown, it’s never possible to merge drawdown funds.
Anecdotally, we hear that some providers are merging existing flexi-access drawdown funds, but this creates a potential problem at the age 75 BCE 5, or BCE 4 if there’s an earlier conversion to an annuity.
Drawdown to drawdown transfers must always be made into empty arrangements.
While Scottish Widows Retirement Account uses a single drawdown arrangement and increments it each time new funds are designated for drawdown, it’s possible for providers to take other approaches. For example, it’s relatively common to set up a new drawdown arrangement each time a member designates funds for drawdown.
Capped drawdown arrangements
Where a member has capped drawdown using more than one arrangement, the provider must keep all the arrangements separate to comply with the capped drawdown rules. It’s possible to align pension years – but not to merge arrangements – once the member reaches age 75.
Flexi-access drawdown arrangements
It might appear possible to merge existing flexi-access drawdown arrangements, because there’s no requirement to carry out three yearly reviews for the under 75s and yearly reviews from age 75. However, HMRC has confirmed that this could cause problems when it comes to conducting valuations for BCE 5A – the second LTA test on attaining age 75 while in drawdown. The same problem applies in respect of BCE 4, if there’s an earlier annuity purchase.
The BCE 5A calculation is based on the value of funds in the arrangement at age 75, less the amount crystallised through BCE 1 into that arrangement. If the arrangement provides for increments, it’s the total of all amounts crystallised via BCE 1 into that arrangement.
However, BCE 5A must be carried out separately for each arrangement in existence at age 75, with no offsetting if there’s more than one arrangement. Therefore any providers that are actually merging separate flexi-access drawdown arrangement need to ensure they can separate out the underlying values on annuity purchase or at age 75.
The approach for BCE 4 is similar.
The underlying legislation confirms that the BCE tests are carried out at arrangement level and not at the level of the aggregate of all arrangements in existence for the member.
|Section 216, Finance Act 2004|
|Benefit crystallisation event||Amount crystallised|
|4: The individual becoming entitled to a lifetime annuity purchased under a money purchase arrangement under any of the relevant pension schemes.
||The aggregate of the amount of such sums and the market value of such of the assets representing the individuals’ rights under the arrangement as are applied to purchase the lifetime annuity and any related dependants’ annuity and any related nominees’ annuity.
|5A: The individual reaching the age of 75 having designated sums or assets held for the purposes of a money purchase arrangement under any of the relevant pension schemes as available for the payment of drawdown pension to the individual.
||The aggregate of the amount of the sums, and the market value of the assets, representing the individual’s drawdown pension fund under the arrangement (if any), plus the aggregate of the amount of the sums and the market value of the assets representing the individual’s flexi-access drawdown fund under the arrangement (if any), less the aggregate of amounts crystallised by benefit crystallisation event 1 in relation to the arrangement and the individual.
Drawdown to drawdown transfers must be made into new, empty arrangements.
If existing drawdown or flexi-access drawdown funds are transferred into an existing arrangement, this is not an authorised transfer. PTM makes it clear that this applies to all forms of drawdown to drawdown transfer.
It’s legislatively possible to crystallise further funds into the arrangement after the transfer has been received, if the provider offers increments to existing arrangements.
22 June 2017