Pension drawdown income up – but not all retirees will benefit

The government has increased the amount of money retirees can take from their income drawdown pension.
By Michelle McGagh

Pensioners in 'income drawdown' could benefit from a boost to their income as the government increases the rate it allows individuals to take from their pension, but many may have to wait for the extra cash.

Income drawdown allows people to keep their pension pot invested but withdraw an income from it each year. However, there are strict rules on how much income can be taken and the level is set by the Government Actuary’s Department (GAD) and is known as the GAD rate. The GAD rate is set against standard annuity rates which are in turn influenced mainly by the yields on gilts (UK government bonds), with low gilt yields equaling low annuity rates.

GAD has increased the amount a person can take each year from their pension from 3% of their pot in September to 3.25% of their pot in October. This is on the back of an increase in the yields on 15 year gilts from 2% in August 2012 to 3.25% today.

The government allows those in drawdown to take 120% of the GAD rate as income, a figure that was increased from 100% in March following industry lobbying.

According to insurer LV= a 65 year old with a £100,000 pot in income drawdown would be able to take £7,320 a year in income, up from £7,080 under the old GAD rate.

Ray Chinn, LV head of pensions and investments, said retirees should look at income drawdown and fixed-term annuities as standard annuities are ‘offering poor returns’.

‘Indeed a low interest rate environment such as this where pensioners who rely on their savings for additional income are hit hard financially these alternatives become even more attractive,’ he said.

Pensions expert Ros Altmann said the increase in the GAD rate coupled with gilt yield rises and the income increase from 100% to 120% of GAD rate was good news for pensioners, but unfortunately many were unable to benefit.

‘This is all great in theory, however in practice drawdown scheme rules are so inflexible that they may not permit access to this increased income now,’ she said.

Pensioners are only allowed to take the extra 20% income in the ‘scheme income year’ following March 2013 when the change was made, said Altmann, which means they may have to wait until March next year to increase their income from 100% to 120% of GAD.

Similarly they can only move to the increased GAD rate at the next income recalculation point, which may be up to three years away for some pensioners.

Altmann said retirees may be able to request a review of their income before the next official one but it is up to the administrator of the fund.

Source: City Wire.com