Income Drawdown Increase From 26th March

Investors using income drawdown will be able to draw a fifth more pension income from 26th March 2013, according to draft legislation published last week. This follows on from George Osborne's Autumn Statement when he confirmed an increase was planned, however didn't confirm the exact timing.

For those that aren't aware, income drawdown allows you to take a retirement income directly from your pension fund whilst keeping the fund invested. Income drawdown is the main alternative to buying an annuity, although it should be known that it has higher risk. Every year you can choose to withdraw an income up to the maximum allowed by the government. It is this maximum amount that is set to change on 26th March 2013.

Increase in Income Drawdown Limits

The limits of income drawdown are calculated with reference to the equivalent annuity the same sized pension fund could buy. Just under 2 years ago the government reduced the maximum that could be taken from 120% to 100% of the equivalent annuity. This is being reversed, with the maximum reversing back to 120% on 26th March, according to the new legislation.

This is good news for many because the April 2011 income cut was not well received by pensioners. The reduction, along with the falls in gilt yields (which set the equivalent annuity figure) resulted in significant income reductions for a number of investors. However, by reducing the amount that could be taken it reduced the risk that investors would seriously over deplete their funds.

How Does It Affect You?

For somone 60 years of age, the change will mean an increase in maximum income from 4.8% to 5.76% of the total fund (this is based on January 2013 underlying gilt yields). The table below shows the limit increases for those of 60, 65 and 70 years of age. It is based on a pension fund of £100,000 and using the equivalent annuity amount for January 2013. This underlying assumption can change. As at 21st December 2012 male and female incomes are equal.

 

Maximum for limits for 100%New maximum for limits for 120%
60 year old£4,800£5,760
65 year old£5,500£6,600
70 year old£6,400£7,680

Take Care

You should remember that drawing the maximum income isn't usually sustainable over the long term. You could be left short of income later in retirement if your pension fund is subject to prolonged periods with too much income being taken, or indeed periods of poor investment performance. The benefits of the higher limit is that it offers investors more control and flexibility (you don't have to take the maximum but it is there if you need it). It also helps to allow you to balance drawdown income with money from other sources, filling an income gap in years when it's needed and leaving it invested in years when it's not.

Why This Date?

The 26th March 2013 is the earliest practical date after the Budget debate in Parliament. It is subject to change.

Will You Benefit?

If you are starting income drawdown after 26th March should benefit from the new limits. In addition, investors already in income drawdown will benefit from the new higher limits from the start of their next 'pension year' following 26th March.

A 'pension year' is the full year from the date you go into income drawdown. For example, if you start income drawdown today your pension year will run from 18/01/2013 to 17/01/2014. Within the pension year you can take any income from £0 up to the maximum calculated at the start. This maximum is reviewed at least every 3 years.