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Drawdown limit to increase in March

Jenna Towler
Written By:
Jenna Towler

The maximum income pensioners can take from their drawdown pension will increase by a fifth from 26 March.

The increase, confirmed in the Chancellor’s Autumn Statement, was set out in draft legislation today.

HM Revenue & Customs (HMRC) explained pensioners would be allowed to choose to receive an authorised pension from their registered pension scheme of up to 120% of the amount of an equivalent annuity. Previously it had been restrcited to 100%.

Standard Life head of customer income solutions Alastair Black said: “The increasing gilt yields and the restoration of the 120% limit is heartening news for those in drawdown. 2013 could be a very important year for income drawdown.”

However, he added: “There is a strong argument for creating a fairer basis for setting drawdown limits by amending the underlying calculations, bringing them more in line with the annuity rates they are supposed to mirror.”

The provider outlined five ways drawdown could be improved:

1. Base pension drawdown limits on a combination of gilt & corporate bond investments.

Standard Life said this could give a 60-year-old 15% to 20% more income.

2. Round up, not down.

A simple move giving consumers the benefit of rounding would typically add another 3% or 4% income. Just round the yields used to calculate pension drawdown rates up to the next 0.25%, not down.

3. Introduce a 3% floor on the yield used to calculate drawdown limits.

This safety net wouldn’t have kicked-in until this year. But it would have helped drawdown users throughout 2012, reducing volatility and protecting consumers against market extremes.

4. Average yields over six months.

Rather than basing pension drawdown rates on security yields on a single day each month, they could use average yields over six months. This would reduce volatility and make planning easier. Instead of the 23 rate changes we’ve seen in the last 36 months, there would only have been 15 (or 11, if combined with a new 3% yield floor).

5. Introduce enhanced drawdown rates for impaired lives.

Introducing special drawdown rates for customers with reduced life expectancy puts annuities and drawdown options on a level playing field – helping to create fairer choice for consumers. Those affected would receive a higher retirement income, reflecting their circumstances and needs.

The gilt yield used to calculate the income limits rose to 2.5% for reviews in February – up from the lowest possible rate of 2% in December. Which can mean significant increases, especially for women.