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| 6 December 2012 last updated |
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| Pension drawdown now 20% more income for pensioners |
In the Chancellor's Autumn Statement it was reveled that pensioners retiring and taking their benefits from pension drawdown will be able to take 20% more income as an option for poor annuities.
Pension drawdown
allows pensioners to take a tax free lump sum of 25% and remain invested rather than buy annuities. They will then have the option to draw an income between current GAD limits of nil to 100%.
The Government's Actuary's Department (GAD)
uses tables to calculate the limits a pensioner can take per £1,000 of funds from pension drawdown based on age and the 15-year gilt yields.
Using this figure the maximum that can be taken is 100% and the Chancellor has decided that this will increase to 120%, which was the original basis before April 2011. Pensioners already in drawdown and at their reviews have been facing a decrease in income in part due to the changes that reduced GAD limits.
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How income is changing with pension drawdown
The Government changed income drawdown GAD limits to protect pensioners from depleting their funds and at the time of the decision the 15-year gilt yields were at 3.98% and the maximum income was 120%. For a male aged 65 with a fund of £100,000 this would mean the maximum income draw was £7,680 pa compared to a lifetime annuity on a single life, level at that time of
£6,813 pa.
In November with gilt yields at 2.23% and 100% GAD limits the income draw had reduced to £5,300 pa or a 30.9% reduction on the original figure in April 2011. People already in drawdown may also have lower fund values if their invested before the financial crisis in 2008 as equity markets reduced considerably. In contrast after significant falls in annuity rates, lifetime annuity provides an income of £5,594 pa.
The reversal of the Government's position will mean people in pension drawdown will now receive an income of £6,360 pa before tax offering better value than an annuity and lower risk of depleting their fund compared to last year and the drawdown is lower.
Drawdown is a higher risk than annuity
Even though pension drawdown will offer a greater income than an annuity there remains risks as the fund continues to be invested. The size of the fund depends on the return on investment and income taken and in most cases the fund will reduce over time if the maximum GAD income is selected. There is also the risk that the fund will be depleted before the pensioner dies so drawdown is really only suitable for people that have alternative pensions and investments.
If this is the case and the income from the State pension and other pension income such as a final salary scheme is greater than £20,000, through flexible drawdown the whole fund can be taken as income less tax. If this is not the case capped drawdown would allow an income from nil to maximum GAD.
For pensioners that are seriously ill an impaired annuity which would offer an enhanced income based on medical conditions. The highest rates are on a single life basis, however, in the event of death the annuity will cease immediately or after a guaranteed period if selected. Another option may be to use capped drawdown knowing that in the event of their death the fund would be available to their spouse to draw an income or buy a pension annuity.
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Age |
Single |
Joint |
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55 |
£6,132 |
£5,784 |
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60 |
£6,532 |
£6,234 |
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65 |
£7,247 |
£6,808 |
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70 |
£8,170 |
£7,616 |
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£100,000 purchase, level rates, standard
Unisex rates and joint life basis |
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