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Government permits income drawdown increase from 26 March

| 14 February 2013

Government permits income drawdown increase from 26 March

Income drawdown investors will be able to draw a fifth more pension income from 26 March, according to draft legislation published on 17 January 2013. This follows George Osborne's Autumn Statement when he confirmed an increase was planned, but didn't confirm when.

Income drawdown allows you to take a retirement income directly from your pension fund whilst keeping the fund invested. It is the main alternative to an annuity, although it is higher risk. Each year you choose to withdraw an income up to the maximum allowed by the government. It is this maximum that is set to change on 26 March.

Quickly calculate today's maximum drawdown income

Maximum income drawdown limits to increase

Drawdown income limits are calculated with reference to the equivalent annuity the same sized pension fund could buy. Only 21 months ago the government reduced the maximum that could be taken from 120% to 100% of the equivalent annuity.

The maximum will reverse back to 120% on 26 March, according to draft legislation.

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

What does it mean for you?

For a 60 year old, the change will mean an increase in maximum income from 4.9% to 5.88% of the total fund, based on February 2013 underlying gilt yields.

Maximum for limits for 100% New maximum for limits for 120%
60 year old £4,900 £5,880
65 year old £5,600 £6,720
70 year old £6,600 £7,920

*based on a fund of £100,000 and using the equivalent annuity amount for February 2013. This underlying assumption can change. As at 21 December 2012 male and female incomes are equal.

Care is needed

It is important to remember 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 periods of poor investment performance. On the plus side a higher limit offers more control and flexibility - you don't have to take the maximum but it is there if you need it. It allows you to balance drawdown income with money from other sources, filling the income gap in years when it's needed and leaving it invested in years when it's not.

How much could you withdraw each year?

Why has the government chosen this date?

26 March is the earliest practical date after the Budget debate in Parliament. It is subject to change. Who will benefit?

Anyone starting income drawdown after 26 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 26 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 14/02/2013 to 13/02/2014. 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.

What if you're already in drawdown and want to transfer?

If you transfer a drawdown plan, its income limit may need to be recalculated on the next anniversary. Where the anniversary is after 26 March, the new income limits will be calculated on the 120% basis. Plans whose anniversaries fall before 26 March will still be calculated on the 100% basis for one more year.

This could be worth noting if maximum income is important to you - you might consider waiting until after 26 March to transfer.

Income drawdown is a complex product. Unlike an annuity the income is not secure. If you are at all uncertain about its suitability for your circumstances we strongly suggest you seek advice.

Find out more - request your free guide to income drawdown

Retirement update emails

This update is based on draft legislation and is correct as at 14 February. Pension legislation is subject to change, as is the intended date of the change.

The value of investments can go down in value as well as up, so you could get back less than you invest. It is therefore important that you understand the risks and commitments. This website is not personal advice based on your circumstances. So you can make informed decisions for yourself we aim to provide you with the best information, best service and best prices. If you are unsure about the suitability of an investment please contact us for advice.


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Our annuity service compares top providers rates in seconds and could mean more income for you.

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Find out more about low cost income drawdown in the Vantage SIPP.

Income drawdown

Annuities

  • A secure taxable income for life that will never run out.
  • You could increase your income by shopping around.
  • Cannot be changed or cancelled once set up - consider your options carefully.
  • Annuity rates change regularly and can go up and down. Quotes are valid for a limited period.

Income drawdown

  • You choose and review your own investments and level of income within limits.
  • Potential to grow income over time, but poor investment performance and excessive income withdrawals can deplete the fund leaving you short of income.
  • Wide investment choice including funds, shares and cash.
  • Offers flexibility but is complex and income is not secure.
  • If you're uncertain about its suitability for your circumstances please seek advice.
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