Pension loophole that could boost your retirement income – but hurry

3 min Read Published: 04 Apr 2011

There is a loophole in the pensions system which can be exploited so that individuals can lock into a higher rate of retirement income before it is reduced on 6 April, according to FT Adviser.

A bit of background

In simple terms, when you come to draw benefits from your pension pot there are two ways of doing this. Either by purchasing an annuity or via what is known as income drawdown. Under the first option you swap your pension pot, with an insurance company, for an income stream (the annuity) which normally continues until you die. But with income drawdown your pension pot remains invested, and therefore exposed to investment market volatility, and you can draw income from your pot as and when you need it. Obviously the government want to make sure that the level of income you can take is broadly in line with that of a comparable annuity. Consequently, there is a maximum level of income you can withdraw from your pension pot every year.

Every 5 years this maximum level is reviewed and recalculated to take into account changes in your age and prevailing gilt rates.

Things are changing

As stated in my article Latest pension changes explained the income drawdown option is changing significantly as of 6th April 2011. But one of the key changes is that for most people the maximum level of income, under the new comparable version of income drawdown, will drop slightly for any new cases. So we have the situation where someone drawing benefits from their pension pot via income drawdown on the 5th April can receive a higher maximum annual income, for the next 5 years, than someone who draws benefits as of 6th April. For people thinking of retiring in the next few years this presents a dilemma. Do they draw their benefits now (which has various implications – and not just the premature timing issue) and be able to receive a higher rate of income or just take it on the chin and accept the lower level of income when they eventually come to retire post 6th April?

The loophole

According to FT Adviser there is a neat way around this problem which avoids taking all your pension benefits now. By moving just a small sum from your pension into drawdown would make the entire pension pot eligible for the higher level of income for the next five years. It's as simple as that. Obviously time is running out to exploit this trick as the end of the tax year is tomorrow. But if you think this could benefit you then get onto your financial adviser and give him/her a headache. That's what you pay them for!

Image: graur razvan ionut / FreeDigitalPhotos.net

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