Investors considering capped drawdown risk seeing their retirement income prospects fall by as much as 8 per cent if they do not lock into a plan in the next few weeks.
People who want to keep their pension invested in the stock market rather than buying an annuity but draw income from it – known as capped drawdown – are being advised to act soon to get the best possible rates.
The warning comes from financial advisers ahead of a revision of the official tables used to calculate income levels for
capped drawdown, which is due to come into effect on June 6.
The new tables, calculated by the Government Actuary’s Department (GAD), replace the existing 2006 tables and will see some men retiring after June 6 hundreds of
pounds per year worse off (see table).
Female investors’ drawdown income will also become less generous after June 6, although not nearly as acutely as males.
“The revision to the tables reflects changes to medium-term gilt yields and to the GAD’s assumptions on longevity,” says Billy Burrows, director of the Better Retirement Group, the specialist retirement advisers. “Below the age of 75 there is a clear advantage to going to a drawdown plan using the rates in the 2006 tables.”
“The difference between the old and new tables is about 1 per cent less for men at age 60 but it rises to 8 per cent less at age 75. For women there is no change at age 60 and by age 75 the difference is 2 per cent.”
The impact of the rate change affects both new and existing investors in capped drawdown, the facility which replaced unsecured pensions (USP) on April 6. The revision is the second of the “double whammies” for capped drawdown investors who from April 6 saw their annual income withdrawal limit drop from 120 per
cent to 100 per cent of the income achievable through an equivalent annuity.
This change alone meant that the maximum drawdown for a man aged 60 with a £100,000 fund fell to £6,000 per annum, compared with £7,200 per annum before April 6, when the income withdrawal rate was 120 per cent.
With the second restriction to hit on June 6, advisers say existing investors should consider locking into the more generous 2006 GAD tables.
Pension provider Hornbuckle Mitchell says clients whose review date for their income drawdown plan falls between April 6 and
June 5 can use the 2006 GAD tables. In addition, there is some flexibility for those whose reference date falls after June 5 up until August 4.
“These clients can request a calculation up to 60 days before their reference date,” says Mary Stewart, director of Hornbuckle Mitchell, the provider. “The new limits are based on the old tables but will only apply from the reference date itself.”
The strategy is thought to be of particular benefit to investors who moved into drawdown soon after “A-Day” in 2006, so are now approaching their five-year reviews.
Under other reforms introduced from April 6, investors can avoid the further squeeze on drawdown income by opting for the new flexible drawdown facility, where there are no income limits.
But to achieve this, investors must have at least £20,000 in additional secure pension income, such as a lifetime annuity or state pension or an occupational scheme.
However, providers suggest that “scheme pensions” could offer a third option if they are ineligible for flexible drawdown.
Scheme pension differs from capped drawdown in that income levels are not linked to GAD tables or
gilt yields, but subject to
an individual assessment by an actuary – which often results in a higher
income than capped drawdown.
Unlike capped drawdown, scheme pension income can be reviewed at the member’s request, for example if their health deteriorates.
Meanwhile, individuals looking to secure their drawdown income should be aware that HMRC rules allow providers to give illustrations on the less generous 2011 tables ahead of the formal introduction on June 6.
This has resulted in a variety of approaches by some of the biggest specialist drawdown providers, with the new tables being used from April 6 for
customers aged over 75
and customers under the age of 75 being offered quotes based on the
“The thinking behind this is that the new tables are broadly equivalent for customers aged 55 to 65, are worse for those aged 65 to 75 and better for those over age 75,” says John Moret of More to Sipps, the drawdown provider.
“I’m not sure how many other providers are operating this way but it
seems like a sensible approach.”