18th January 2013
In the autumn statement, the Government announced that it was moving the maximum withdrawal limit for capped drawdown from 100 per cent to 120 per cent of a calculation based approximately on 15 year gilt yields. This calculation is usually referred to as the GAD limit because it is set by the Government Actuary’s Department.
The Government has now published the draft legislation to allow this to happen though it could change a little but probably not significantly during the consultation period. Whatever happens, things do not change automatically for drawdown investors. For example it will depend, among other things, on when you started the drawdown plan or last had a review. Depending on that date it could be almost a year before you can revise the amount upwards.
In addition, if you are nearing retirement and want to shift your pension investments into a drawdown arrangement you may wish to delay the decision until the end of March if you want to take maximum income from it.
Of course, the policy change follows a previous decision by the Government to cut the amount investors can take from 120 per cent to 100 per cent which applied from 2011. At the time, the rationale for the reduction was that investors could exhaust their savings and it might not be made up by investment returns.
Investors in drawdown had seen their investments come under pressure from relatively poor stock markets, falls in gilt yields with the amount they could take also reduced because of that change. So effectively they may have been restricted to taking a smaller percentage of a lower maximum from a smaller pot of money. Some pensioners have seen their income reduced dramatically.
At the same time, any individuals taking out a drawdown plan now need to be aware of just how much they are withdrawing or in other words the maximum isn’t necessarily there to be taken advantage of. Indeed, you don’t need to take out anything if you have other income sources though of course that is also unrealistic for many people.
Commenting on the change and warning of the risks, Tom McPhail, Hargreaves Lansdown's head of pensions research says: “These proposals will help those who have suffered the double whammy of falling gilt yields and weak investment performance. This issue does show how important it is to moderate the amount of income taken from an income drawdown. In my view, 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 escalating annuity at age 65, a sensible choice for those needing to maintain the spending power of their pension income over time.”
Hargreaves Landown has provided some very good examples of the amounts that you can drawdown and when these amounts may change below:
Based on £100,000 drawdown fund, using February Gad rates
· 60 year old – currently gets £4,800 – this will increase to £5,760 (compares to RPI-linked annuity of £2,880)
· 65 year old – currently gets £5,500 – this will increase to £6,600 (compares to RPI annuity at £3,633)
Details of the change
· The 120 per cent limit will apply to all drawdown pension years, starting on or after 26 March 2013
· Investors currently in a drawdown year which started before 26 March 2013 will remain on 100 per cent until their next drawdown year.
· For those in income drawdown before 6 April 2011 the five year review period will still end on the earlier of
The date of the next five year review due after 5 April 2011
The date that a member requested review on the plan anniversary takes place
The end of the pension year after a drawdown to drawdown transfer takes place
The end of the pension year after reaching 75
The review will be based on 120 per cent, not 100 per cent
This means people can request a review at the next anniversary date but not before
An individual will drop to 100 per cent for one drawdown year if they;
complete a drawdown to drawdown transfer between now and 26 March 2013
were in drawdown before 5 April 2011, and have not started a three year reference period since 5 April 2011.
The maximum income that can be taken from drawdown will also vary according to age, gilt yield and fund size. These factors may offset the impact of the switch from 100 per cent to 120 per cent.