Autumn Statement: Government U-turn on capped drawdown limit
The government today announced that the maximum income limit for capped drawdown would be pushed back up from 100% to 120% of the value of an equivalent annuity.
The change was buried in the Autumn Statement 2012 document and represents good news for pension savers who don't want to buy an annuity when they reach retirement.
The announcement is something of a U-turn as the limit was only reduced from 120% to 100% in April 2011.
The reduction last year, coupled with falls in gilt yields, has meant some drawdown customers have seen the maximum amount that can be withdrawn from their pension each year fall by up to 50%.
The government imposes a limit on capped drawdown to ensure that people don't take their money out of their pensions too quickly and fall back on state means-tested benefits.
The Autumn Statement document did not contain any further details, for example when the limit would be increased.
Pension provider AJ Bell has been campaigning for a 120% drawdown limit for some time.
The firm says it has been told that the change will need legislation and that HMRC will speak to the industry about the increase. According to AJ Bell, draft legislation will be introduced before the Budget next April.
On the timing of the change, Andy Bell, chief executive of AJ Bell, says "from our and government viewpoint, the sooner the better".
He comments: "Pension savers have spoken and the government has heard. This welcome news will hopefully be the start and not the end of a journey towards income drawdown rules that are fair, simple and sustainable."
Some pension experts say drawdown customers should exercise caution though.
Andrew Tully, pensions technical director at MGM Advantage, says: "The underlying reasons for previously changing the income limits are still there. There is a potential for drawdown customers to run down their fund quickly.
"The risks of remaining in income drawdown increase substantially as people get older, so many will wish to consider some form of annuity once they are in their 70s."
Ray Chinn, head of pensions at LV=, adds: "The changes to the drawdown limit is good news, especially for those customers who have been badly hit by previous reductions. However, we urge people to take advice around the sustainability of income levels in drawdown, and to look at the wide spectrum of products available in the retirement income space."
An alternative to an annuity, income drawdown (also known as an unsecured pension) allows you to take income from your pension fund while the fund remains invested and so continues to benefit from any fund growth. The drawdown of income has to be calculated carefully as taking too much income could exhaust the pension fund so experts say the annual drawdown must not exceed what the assets would normally yield in an average year. The invested pension fund could also be hit by market turbulence and the value of the assets could fall.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.