New rules will give your pension a major boostGovernment lifts cap on income drawdown

13 December 2012

The government is to relax income drawdown rules in 2013 to permit higher annual withdrawals. Tighter limits imposed in 2011 led to drastic falls in some retirement incomes.  

Income drawdown 

Income drawdown is an alternative to buying an annuity with your pension pot when you reach retirement. Rather than locking into a long-term arrangement based on current annuity rates, you leave your pension fund invested, normally in a self-invested personal pension (SIPP), while drawing on it for pension income as required.

Drawdown limits 

For most people, the amount you can take from your pension fund under a drawdown arrangement is restricted. It is based on the amount you could have secured by buying an annuity instead, as calculated by the Government Actuary Department (GAD), whose tables show how annuity income varies according to your age and prevailing annuity rates. 

These are influenced by gilt yields (used by annuity providers to finance their product) and are periodically updated. Revisions also reflect demographic change, notably increased life expectancy. As people live longer, the cost of a lifetime annuity rises, driving down rates. In 1990 annuity rates were at 16% - today they average less than 6%. 

Capped drawdown

Until 2011, the amount you could take in drawdown was 120% of the GAD table annuity figure. Concerned that people might withdraw too much from their fund and be left short in later years, the government changed the rules in April 2011. 

Those in capped drawdown are currently restricted to 100% of the GAD figure, subject to a review every three years. After the age of 75, income reviews are conducted annually. 

Severe drops in retirement income

Although the intention was to help those in drawdown, the outcome has been a severe drop in pension income for many. The shift from 120% to 100% co-incided with with a recalculation of the tables to reflect falling annuity rates. 

A 65 year old man, with a pension pot of £200,000 found the maximum sum he could take as income fell from £16,320 in December 2010 to £11,200 in December 2011, a drop of 31%. For some the fall was steeper still. Poorly performing investments stunted fund growth, which in turn led to a further fall in permitted withdrawals.

Flexible drawdown   

The only way to escape the restrictions on income drawdown is to qualify for flexible drawdown. Under the 2011 rules, you need to have a guaranteed retirement income of at least £20,000 to do this. 

Further changes to drawdown rules  

In his December 2012 Autumn Statement, the Chancellor, George Osborne, announced that the 2011 change would be reversed and that 2013 would see a return to a 120% GAD limit for those using income drawdown. The exact timing of the change has yet to be announced, but it is expected to be confirmed in the 2013 Budget and subsequent Finance Bill.

Which? pensions expert, Ian Robinson said: 'The ability to draw a higher pension income will be welcome by many retirees, although raising the limit also increases the risk that some will prematurely deplete their pension fund. This is a particular risk if investments do badly. Before making any changes it would be sensible to review your fund closely and take professional advice where necessary.'

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