Posted 7 Oct 2014 | Industry

Low-cost launch to exploit capped drawdown carve-out

A specialist pension asset manager has become the latest to set to exploit a carve-out in the new pensions freedoms that will allow retirees to maintain an annual allowance four times higher than under new drawdown rules if they are already in ‘capped’ drawdown prior to next April.

Jessop Fund Managers has launched what it described as a “no-fee” capped drawdown product, which the firm said was a response to demand for low-cost alternatives to annuities that continues to increase in the wake of the Budget and subsequent announcements.

Almost 9,500 income drawdown contracts were agreed in the second quarter of 2014 compared to 5,476 in the same period last year, figures from the Association of British Insurers show.

Capped drawdown, which since Budget 2014 allows clients to take up to 150 per cent of the Government Actuarial Department rate as an annual income, will no longer exist from next April, when new rules come into force.

From next April clients that do not simply choose to withdraw all of their money to put elsewhere or to spend, will be have three options: an annuity, unlimited ‘flexi-access’ drawdown, or a new uncrystallised fund lump sum option.

In order to mitigate a tax loophole that would have allowed clients to ‘recycle’ their 25 per cent tax-free allowance, under the new rules once a fund is crystallised the annual limit on what can placed tax-free into the pension wrapper will drop from £40,000 to £10,000.

However, this will not apply to capped drawdown, rules governing which will be ‘grandfathered’ into the new regime. This means that savers in capped drawdown before April 2015 will retain their £40,000 annual allowance.

Jessop said it would be launching a ‘flexi-access’ drawdown option before April and that savers in the newly-launched JFM Income Drawdown plan would be able to choose to stay in capped drawdown or move into the new alternative with no caps on withdrawals.

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