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year, coupled with falls in gilt yields, has meant some drawdown customers have seen the maximum amount that can be withdrawn from their pension each year fall by up to 50%.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."

Your Comments

I think that this is very welcome news. I wonder what chinless wonder in the civil service actually came up with this suggestion in the first place? Probably someone on a good salary with a gold plated pension scheme paid for by others!
Seriously though I can see that folk who have seen their pension pot reduce [who hasn't over the past couple of years] would find it very hard to voluntarily reduce the income that they are taking if that is their prime source of income? Against that, their are a lot of folk who have spent years saving into these plans and in addition have other savings that they can draw upon to supplement income who should not be dictated to about how to spend their money. If one has had a savings ethic through your life why should that be deemed to change as soon as you retire? The additional available income to pensioners will do no harm to this countries hard push to escape the wilful destruction by Gordon Brown of our nations reserves.

How can the Government take so long to actually see that any changes to payments made in the interim are made up to the 120% when they have conceded they got it wrong. If you happen to have had your review in this time you are already affected. My income as with others had already been slashed drastically and I think as they have backtracked this should be pushed through urgently. I was so pleased when I heard the news but had not realised there would be delays to this extent.