This works in a similar way as phased annuity purchase. The member selects a level of income and then sufficient funds are crystallised and placed into their capped drawdown pension to provide this.

EG – On 1 May 2014 Melissa crystallised part of her pension fund to provide her with a lump sum via phased capped drawdown. At that time she required a lump sum, net of basic rate tax, of £20,000.

Based on the GAD rates that applied to her on 1 May 2014 Melissa crystallised £66,979 of her fund. The lump sum she received was provided via a PCLS payment of £16,670 with the remaining £3,330 net (£4,163 gross) being paid from her capped drawdown fund and taxed as her pension income via PAYE.

£4,163 gross (i.e. 150% of Melissa’s basis amount) was the maximum amount she could take from her capped drawdown fund each pension year until the end of the reference period (or earlier if additional funds are designated to the arrangement, funds are withdrawn to purchase an annuity or due to the application of a pension debit). However, as Melissa has other sources of income and capital she did not withdraw any further funds during the reference period. On 1 May 2017 her basis amount was reset for a further three years.

In May 2018 Melissa decided that she would like to receive a further sum via her capped drawdown arrangements of £20,000 after basic rate tax.

Because the additional funds were designated to the same capped drawdown arrangement, the basis amount was recalculated for the whole fund. Melissa discovered that the GAD rate that applied for funds designated in May 2018 (based on her age and the gilt yield on 15 April 2018) was £47 per £1,000.

To know how much she needed to crystallise, she first needed to know the amount she could withdraw from her existing drawdown fund following the review. Due to some poor fund performance, the fund was valued at £49,000 and so the maximum amount she could withdraw net of basic rate tax was:

• £49,000 × £47/£1,000 × 8 × 150% = £2,763.60 net of basic rate tax.

This meant she needed to designate funds to provide an additional net lump sum of:

• £20,000 – £2,763.60 = £17,236.40 net of basic rate

To calculate the amount of her funds that must be crystallised to provide this income we work on the same basis as we saw in example 6.23;

• each £100 of fund provided £25 of PCLS; plus
• an amount net of basic rate tax of £75 × £47/£1,000 × 8 × 150% = £4.23

Therefore, every £100 of fund Melissa crystallised provided her with a net lump sum of £25 + £4.23 = £29.23.

To work out how much of the fund needed to be crystallised the target lump sum figure of £17,236.40 was divided by an ‘annuity rate’ of 29.23%.

• £17,236.40/0.2923 = £58,968.18
• 25% of this (£58,968.18 × 25% = £14,742.04) is paid as PCLS.

The balance of the funds were paid into her capped drawdown fund and the basis amount reset to [£49,000 + (£58,968.18 × 75%)] × £47/£1000 = £4,381.62 which gave her a revised maximum gross income of:

• £4,381.62 × 150% = £6,572.43

This maximum income applies until the start of the next reference period (1 May 2020) unless Melissa designates further funds into her plan.