The rules on pension drawdown have been relaxed, with the cap on annual income being restored to 120% of the Government Actuary Department (GAD) rate.
Drawdown rule change benefits pensioners
Entering into an income drawdown scheme allows you to leave your money invested in the stock market when you retire, rather than buying an annuity for a guaranteed income. The amount you can take each year from your pot is tied to the GAD rate, which in turn is based on annuity rates – you can draw down roughly the same amount you would get if you had chosen to buy an annuity.
Until 2011, the amount you could take in income drawdown was 120% of the GAD rate. Concerned that people might withdraw too much and be left short in later years, the chancellor cut this to 100% in April 2011.
This meant that pensioner income was cut – and worse, the shift from 120% to 100% coincided with a recalculation of the tables to reflect falling annuity rates. That’s why the restoration of the limit to 120%, announced in last year’s Autumn Statement, could be good news for the thousands of pensioners who have a drawdown arrangement.
Poor performance from annuities
The change in the rules is particularly welcome because of the recent historic lows in annuity rates. Although they began improving at the end of last year, annuity rates are still 25% lower than they were in 2007. The average annuity income for a 65 year old man has fallen by around 50% over the last 20 years.
This is because annuity rates are tied to gilt yields, which have been falling since the recession. Gilt yields have been worsened by continued quantitative easing (QE) by the government – the purchasing of gilts via QE pushes down their yields further.
Staying invested in the stock market – in riskier assets such as shares – gives you the potential for higher returns, and could enable you to take a healthy income and try and maintain the size of your pension pot. Income drawdown is only appropriate for people with bigger pension pots – anything above £150,000 to £200,000.
When can I access the higher limit?
If you’re currently in drawdown, you’ll be able to access the higher capped rate at your next drawdown review. These reviews take place every three years, but you can request a review on the anniversary of your last one.
It’s bad news for people who have had a drawdown review in the past three months though, as they’ll have to wait until next year to get the higher rate.
Drawdown limit warning
But a word of warning – income drawdown does mean that you could deplete your pension pot more quickly, especially if you take the maximum amount each month.
And with people living longer than ever before, this could negatively impact your quality of life in retirement. Our guide, How much money will I have in retirement?, can help you with budgeting in your later years.