Boost for pension incomes – but it’s not all good news
In the recent Autumn Statement the Government announced that there will be a relaxation to the income drawdown rules in 2013. Stricter rules were implemented in 2011 which led to dramatic reductions in some retirement incomes.
What is income drawdown?
Income drawdown is an alternative to buying an annuity on retirement where you leave your money invested and withdraw income when required. Normally this option is available in a Self-invested Personal Pension (SIPP).
What are the current rules on income drawdown?
For most people the amount you can drawdown is capped at 100% of the amount you could have received if you purchased an annuity, based on the Government Actuary Department's standard rates. These are referred to as the GAD rates (GAD) and reflect gilt returns as well changes in life expectancy and other demographic changes.
However, if you are in receipt of a pension income of at least £20,000 the above rules do not apply and there are no limits to the amount of income that can be taken, although it is taxable at your highest marginal income tax rate. This is known as flexible drawdown.
What are the changes being made to the income drawdown rules?
Basically, the changes made in 2011 are to be reversed and the income allowed will now up to be a maximum of 120% of GAD. So pensioners affected by the 2011 changes, as well as falling gilt yields, should be able to draw a higher income.
When will these changes to income drawdown be implemented? The bad news
The exact timing of the change is yet to be announced but it is expected to be confirmed in the 2013 Budget and subsequent Finance Bill. This means that any change is unlikely to be implemented until July which in itself is a problem. Once in drawdown income levels have to be reviewed every 3 years, or every year if you are over 75. But for those stuck on a 3 year cycle it is possible to request an interim review 12 months after your last income review. But that still means that if the new 120% GAD limit does not come into effect until the middle of next year some people may be stuck on the old 100% limit until 2014 at the earliest.
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