Reference date is the date on which funds were designated into capped drawdown

It is also the first day of the pension year

The basis amount is recalculated every 3 years from the reference date for members below 75 years old. This remains until the member:

• Requests to end the reference period early and is accepted by the scheme administrator
• Informs the scheme administrator that the pension is moving into flexi access drawdown
• Uses the whole fund to purchase a lifetime annuity
• Dies
• Reaches age 75

At age 75 the review becomes an annual review period at the start of the pension year following the 75^th birthday.

The scheme administrator will carry out a recalculation of the basis amount within a 60 day window ending on the new reference date (due to the 3 year or 1 year period ending)

The date the scheme administrator uses within the 60 day window is called the nominated date.

A member under age 75 can request that the reference period finishes before the end of the three years. It is important to note the following:

• the reference period can only end at the end of a pension year;
• the scheme administrator has to agree to this

There are four scenarios which will automatically trigger a recalculation immediately:

1. Part of the fund is used for a lifetime annuity
2. Part of the fund is used to enter flexi access drawdown
3. Member goes through a divorce with a Pension Sharing Order which reduces the pot
4. More funds are added into the capped drawdown pension arrangement

If the basis amount increases, the member can immediately take the higher amount. But if it has reduced the basis amount then the reduced amount only starts from the pension year following the event.

EG Julia designated funds to capped drawdown on 1 July 2014. This is her reference date and the start of her pension year.

At this time Julia was aged 70 (although she became 71 on 16 July 2014) and the funds designated to drawdown were valued at £600,000. To calculate her basis amount the scheme administrator:

• established that the gilt yield on the 15 June 2014 was 3%; and
• Julia’s age attained at the date of designation (70); and then
• obtained the appropriate GAD rate from the 2011 table for a male life (remember: rates are unisex and it is the male rates that are used).

The rate based on this information was £69 per £1,000 which is equivalent to an annuity rate of 6.9%. Julia’s basis amount was therefore calculated as:

• £600,000 × 069 = £41,400 p.a. gross.

As a consequence, for the next three pension years her maximum GAD income was calculated as 150% of this figure (i.e. £41,400 × 150% = £62,100).

In her first pension year (1 July 2014 to 30 June 2015) Julia did not take any income. Remember this ‘unused’ income cannot be rolled forward to a subsequent pension year. In the following two pension years Julia took an income of £25,000 p.a. gross.

Julia’s third pension year ended on 30 June 2017 and so the scheme administrator recalculated her basis amount. To help ease the administration burden, the scheme administrator can perform this calculation on any date they nominate (i.e. not Julia) in the 60 days leading up to the new reference date (which will be 1 July 2017). This gave them a window of between 3 May 2017 and 1 July 2017.

The scheme administrator nominated a date of 15 June 2017. To recalculate the basis amount they established that:

• Julia’s age on the nominated date is 73;
• the gilt yield on 15 May 2017 (15th of the month prior to the nominated date) is 58%, which is rounded down to 1.5%; and
• the drawdown fund was valued at £654,000.

As the calculation took place before 1 July 2017 the base gilt yield of 2% still applied and therefore a gilt yield of 2% was used when re-calculating Julia’s revised maximum GAD income.

The appropriate GAD rate from the 2011 male tables was £70 per £1,000 and Julia’s new basis amount, applicable from 1 July 2017 was £654,000 × 0.070 = £45,780, with a maximum GAD income of £45,780 × 150% = £68,670.

This income level will not apply for three years as Julia reaches her 75th birthday on 16 July 2018, which is just after the start of the second pension year. As a result, Julia will switch to annual reviews no later than the start of the pension year following her 75th birthday (i.e. from 1 July 2019).