Autumn Statement: Government U-turn on capped drawdown limit

Published by Ruth Emery on 07 December 2012.
Last updated on 07 December 2012

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year, coupled with falls in gilt yields, has meant some drawdown customers have seen the maximum amount that can be withdrawn from their pension each year fall by up to 50%.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

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