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Potential good news for pensioners as gilt yields rise

17 September 2013

  • Rising gilt yields and revised regulations could increase pensioner incomes from income drawdown by 50%
  • But inflexibility prevents pensioners from accessing more of their money
  • By the time they are allowed to, the opportunity may be lost
  • Need to make drawdown more flexible and allow for ill-health

 Recent rises in gilt yields and Treasury rule changes for income drawdown mean people could now take much more money out of their pension funds than last year.  This should be really good news for pensioners, but they are often unable to benefit.

40% increase for men and 50% for women since August 2012:  In August 2012, the drawdown income limits fell to a record low, with a combination of Bank of England policies and Treasury rule changes conspiring to drive down pensions from income drawdown.   Since then, conditions and rules have improved dramatically resulting in far higher potential incomes for pensioners in drawdown.

 Treasury rule change in March 2013 allowed people to take out 20% more: In March 2013, Government rule changes allowed pensioners to take out 20% extra from their funds.  The Treasury bowed to pressure to increase the drawdown limits as government bond yields fell sharply following the Bank of England’s Quantitative Easing policy.

Recent rise in gilt yields increases amounts that can be withdrawn as GAD rate rises:  The second factor increasing drawdown incomes is the recent increase in gilt yields.  15-year gilt yields have risen from 2% in August 2012 to around 3.25% now.

65 year old man with £100,000 drawdown fund could take extra £2,000pa now: The table below shows the changes that have occurred since August 2012, with an increased maximum allowance of 120% of the GAD rate and higher gilt yields.  A 60-year old man is now entitled to over 40% more income than this time last year and a 65-year old to 38% more.  This amounts to around £2,000 a year extra income that they should be able to take out of their drawdown fund.

 Change in maximum annual withdrawal allowed for 65 year old men since August 2012

15-yr gilt yield 2% Aug 2012 Male rate

15 yr gilt yield 3.25%

Difference as gilt yields rise 2% -> 3.25%

Extra income per year

100% of GAD

120% of GAD

Age 55

£ 4,100

£ 5,880

43.4%

£1780

Age 60

£ 4,600

£ 6,480

40.9%

£1880

Age 65

£ 5,300

£ 7,320

38.1%

£2020

Age 70

£ 6,200

£ 8,400

35.5%

£2200

Age 75

£ 7,700

£10,200

32.5%

£2500

 

Women also benefit from unisex rates too, meaning potential 50% higher income: For women there has also been a third positive factor.  Annuities moved to gender neutral pricing at the end of 2012, which meant that the Government Actuary had to make its drawdown tables unisex too.  Moving women onto men’s drawdown limits has boosted the income withdrawal allowances for women, since the female rates were previously lower than male rates due to women’s longer life expectancy.

 Change in maximum drawdown income allowed for women age 65 since Aug 2012

15-yr gilt yield 2% (Aug 2012

female rate)

15 yr gilt yield 3.25%

Difference as gilt yields rise 2% -> 3.25%

Extra income per year

100% of GAD

120% of GAD

Age 55

£ 3,900

£ 5,880

50.8%

£1980

Age 60

£ 4,300

£ 6,480

50.7%

£2180

Age 65

£ 4.900

£ 7,320

49.4%

£2420

Age 70

£ 5,800

£ 8,400

44.8%

£2600

Age 75

£ 7,000

£10,200

45.7%

£3200

 

This is all great in theory, but in practice drawdown rules are too inflexible to allow pensioners to benefit:  This all sounds great in theory, however in practice drawdown scheme rules are so inflexible that they may not permit access to this increased income now.

Can only get 120% of GAD at start of next ‘scheme income year’:  Pensioners can only move from 100% to 120% of GAD limit from the ‘scheme income year’  following March 2013, which could mean waiting till March 2014 to increase their income withdrawal.

Can only move to new GAD rate or unisex rate at next ‘recalculation point’ which could be up to three years away: In relation to the other factors which have also boosted the permitted income withdrawals from income drawdown, the inflexibility of the drawdown rules can be even worse.  Increases due to the rise in the GAD rate and unisex rates cannot be reflected until a ‘recalculation point’ is triggered in their income drawdown policy.  A ‘recalculation point’ will only be reached automatically at the next statutory review point, but for some this could be up to three years away.  During that time, some of the beneficial changes may actually have reversed and people’s money will remain stuck in their drawdown plan without them being able to take advantage of the better environment.

No allowance for poor health:  Even though the annuity market does give higher income for those in poor health, income drawdown rules do not offer ‘impaired life’ rates.  Those who are in ill-health may be reluctant to give all their money away to buy an annuity, but may also need to take more money out of their drawdown pension fund to live on.  The inflexibility of drawdown rules can cause hardship and it is particularly frustrating at the moment because there is a theoretical opportunity to take more money out, but pensioners seem too often unable to take advantage of this.

 

Can anything be done? There are some possible avenues:

1.  Activate an annual review:  It might be possible to request an additional review, before the next one is officially due.  Anyone who takes out an income drawdown policy  before age 75 will usually have a three year statutory review period.  After age 75, the review period falls to one year.  However, some schemes will allow you to opt for an annual review facility.  This allows a yearly check on whether more money can be withdrawn than the current maximum.  It is up to the administrator of the fund, however, to decide whether to allow these non-statutory reviews.

2.  Top-up the income drawdown fund:  Another option for anyone under age 75 might be to use other pension fund money or set up a new pension contribution.  Transferring new pension fund money into an income drawdown fund can trigger a new calculation point, which could allow the pensioner to take advantage of the more favourable conditions and take more money out of the fund.

3.  Buy an annuity or scheme pension with part of the drawdown fund:  If the pensioner decides to use a part of their drawdown fund to buy an annuity or scheme pension, then the rest of the fund can be reassessed in light of current circumstances.  That could allow the pensioner to benefit from the higher levels of maximum withdrawal.

You can access the drawdown tables by clicking on the link on the following page: http://www.hmrc.gov.uk/pensionschemes/gad-tables.htm

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