Major potential income boost for female retirees
Retired women in income drawdown schemes could see the retirement income available to them increase by as much as 67% on this time last year, according to research by Skandia.
A combination of factors has worked in their favour.
Pension funds have benefitted from stockmarkets' strong run, with the FTSE 100 up more than 15% over the year, while gilt yields have started to rise from their historic lows.
Those market-based changes have been complemented by policy developments. Rule changes have ended gender-based pricing (which meant lower annuity rates for women because they tend to live longer than men) and, in addition, the government has boosted maximum income drawdown levels by 20%.
However, retirees may have to take action in order to feel the benefit sooner rather than later. Although income drawdown clients have regular income reviews, Skandia warns that much of the uplift to incomes due as a result of these elements may not affect many women for some time.
Uplift in income
"For women currently in a three-year statutory review period, the 20% uplift in the maximum annual income will happen automatically at the start of the next scheme income year after 26 March 2013," says a Skandia spokesperson.
"But any uplift as a result of the other factors will not happen until a recalculation point is triggered within the pension."
That could be a statutory review – but it could be up to three years away. Skandia suggests opting for an annual review facility with their income drawdown provider.
That would mean individuals have the option of recalculation when changes have moved in their favour during the year, so they can lock in the new higher income entitlement. But there's no obligation to have a review that year if conditions have deteriorated.
Alternatively, a new recalculation point could be triggered if savers top up their drawdown fund (from an existing partially-activated pension pot, or with a new pension contribution, if they're under 75 years old).
"Activating an annual review or topping up their drawdown fund are the simplest ways for retirees in capped income withdrawal, particularly women, to benefit from these changes sooner rather than later, with no downside," says Skandia pension expert Adrian Walker.
This article was written for our sister website Money Observer
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.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
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.