Q&A: Changes to drawdown rules

Pension investors will soon be able to take more cash from their funds after the government announced some rare good news for savers in retirement.

New rules expected to be in place from late March will allow “capped drawdown” investors, hamstrung by a cut to income limits two years ago, to take up to 20 per cent more cash from their pension pots.

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What has happened?

The government has announced plans to change the way annual income limits are calculated for those who have kept their pension savings invested instead of buying a secure income in the form of an annuity.

Currently, the maximum amount of income that can be drawn is 100 per cent of a comparable annuity based on tables drawn up by the Government Actuary Department (GAD) rate of 100 per cent.

But draft rules set to come into force “on or after” March 26, will see this GAD rate become more generous, rising to 120 per cent. This means that investors will be able to take up to a fifth more income.

Wait. Hasn’t this rate already changed?

Yes, in April 2011 the income limit was reduced from 120 per cent to 100 per cent of GAD. This cut, combined with tough market conditions, led to a severe income drop for thousands of investors.

What difference can I expect to my income levels?

A 65-year-old investor with a £100,000 fund who went into drawdown this month could expect a maximum income of £5,500 per year under the 100 per cent GAD rate. This would rise to £6,600 per year under the new 120 per cent rate.

Will everyone benefit?

Not at the same time. Existing investors should not assume that they will automatically be included in the uplift as the rules only apply to new business from March 26.

Some existing investors may have to wait for 12 months before they take advantage of the higher rate as their income limits are locked.

I am planning to move into drawdown. Should I delay?

“Those looking to go into capped income for the first time should consider waiting, if possible, until after March 26, to get the 20 per cent uplift,” says Adrian Walker, pension expert at Skandia.

I am an existing investor. Is there any action I can take to get the higher limit?

Existing investors, who are limited to an income of 100 per cent of an equivalent annuity, will automatically be included in the uplift starting with the first anniversary on or after March 2013 26 of when their reference period started.

There is no action the member can take to get the higher limit earlier than this

Skandia's Walker adds that is important people speak to their financial adviser to establish when the new calculation basis will affect their income, and whether any action is required.

Does it cost anything to bring forward this review?

Yes, and the price could range up to £100 or so. Check with your provider.

Is it wise to set my income limits at the higher 120 per cent rate?

There is no requirement for you to set your income limits at the higher rate. As a guide, advisers suggest taking an income no more than the natural yield generated from the underlying investments is the optimum way to protect a drawdown fund over time.

“This is also broadly equivalent to an RPI (retail price index) escalating annuity at age 65, a sensible choice for those needing to maintain the spending power of their pension income over time,” says Tom McPhail, head of pensions research with Hargreaves Lansdown.

Is it certain this rule change will go ahead?

The change is currently draft legislation, subject to consultation.