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
by Dr. Ros Altmann
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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Recent rise in gilt yields increases amounts the can be withdrawn as GAD rate rises: The second factor increasing drawdown incomes is the recent increase in gilt yields. 15-year gilt yields have risen from 2% in August 2012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
|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 them to access 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.
Dr. Ros Altmann
NOTES FOR EDITORS:
The Government Actuary restricts maximum income from income drawdown in line with annuity rates: The maximum income that can be taken from an income drawdown fund is set by the Government Actuary, who has decided that it should be based on the equivalent income that could be received by buying a standard single life, level annuity. As most annuities are secured by insurance companies by buying Gilts to meet their long-term liabilities, and annuity rates are sensitive to changes in Gilt Yields, the maximum income allowed is related to the current gilt yield. The limits are generally set for the next three years after starting an income drawdown contract, and every year from age 75.
Information required is age, 15-year gilt yield and size of fund: The information needed to work out the maximum income that can be taken from an income drawdown fund (also called a pension fund withdrawal plan) is firstly your age, secondly the latest 15-year Gilt Index Yield and thirdly the value of your fund.
15-year gilt yields taken from FT on 15th of each month, rounded down: Gilt yields change frequently so it is necessary to check the updated figure. The yield relevant for income drawdown limits each month is the yield on 15-Year Gilts as published in the Financial Times on the 15th day of the previous month (or the next available date if the 15th is on a weekend), rounded down to the nearest quarter of a percent.
GAD tables show maximum income per £1000 for each gilt yield: Once the 15-year gilt yield is known, the next stage in working out the maximum income is to look up the tables provided by the Government Actuaries Department (GAD), which show the maximum income that can be taken per £1,000 based on age and the 15-year gilt yield. (See Table A in the notes).
Multiply maximum by 120% and scale up for each £1000 of fund: Once the basic amount of income per £1,000 of pension fund is known, the maximum income withdrawal is 120% this figure scaled up by the fund size. So a £100,000 drawdown fund permits withdrawals up to 120% of 100 times the figure in the GAD table. (You do not have to take any income from the fund at all, but those who wish to take out as much as possible need to know the maximum they are permitted. Exceeding the maximum withdrawal will incur hefty tax penalties).
Limits only reviewed every three years (annually after age 75): Once the income limits are set, they are reviewed again exactly three years from the reference date, and the new limits will also depend on the same factors – age, fund size and 15-year Gilt Index Yield.
Table A: GAD TABLES
Income that can be withdrawn per £1000 of drawdown fund
|AGE||Gilt yield 2%||
Maximum annual withdrawal allowed from a £100,000 drawdown fund for a
65 year old as gilt yields change
|15-yr gilt yield 2.5%||15 yr gilt yield 3%||15 yr gilt yield 3.25%||15 yr gilt yield 3.5%||15 yr gilt yield 4%||Difference as gilt yields rise 3% -> 4%|
|Age 55||£5,280||£ 5,760||£ 5,880||£ 6,120||£ 6,600||14.6%|
|Age 60||£5,880||£ 6,360||£ 6,480||£ 6,720||£ 7,080||11.3%|
|Age 65||£ 6,720||£ 7,080||£ 7,320||£ 7,560||£ 7,920||11.9%|
|Age 70||£ 7,920||£ 8,280||£ 8,400||£ 8,640||£ 9,000||8.7%|
|Age 75||£ 9,600||£ 9,960||£10,200||£10,440||£10,800||8.4%|
TABLE C: GAD limits at each age for different gilt yields
|15 yr gilt yield 2%||15 yr gilt yield 2.5%||15 yr gilt yield 3%||15 yr gilt yield 3.25%||15 yr gilt yield 4%|
|Age 55||£41||£ 44||£ 48||£ 49||£ 55|
|Age 60||£46||£ 49||£ 53||£ 54||£ 59|
|Age 65||£53||£ 56||£ 59||£ 61||£ 66|
|Age 70||£62||£ 66||£ 69||£ 70||£ 75|
|Age 75||£77||£ 80||£ 83||£ 85||£ 90|
TABLE D: GAD limits at each age for 2% and 3.25% gilt yields
|15 yr gilt yield 2%||15 yr gilt yield 3.25%|
|Age 55||£ 41||£ 49|
|Age 60||£ 46||£ 54|
|Age 65||£ 53||£ 61|
|Age 70||£ 62||£ 70|
|Age 75||£ 77||£ 85|
TABLE E: GAD limits for women at each age for 2% gilt yields as at August 2012
|15 yr gilt yield 2%|
|Age 55||£ 39|
|Age 60||£ 43|
|Age 65||£ 49|
|Age 70||£ 58|
|Age 75||£ 70|
|Age 80||£ 91|
Dr. Ros Altmann
17 September 2013