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Pensioners in drawdown to receive income boost from March

The limit on the amount of income that can be taken in drawdown is to be increased in March.

Pensioners in drawdown to receive income boost from March

Pensioners in drawdown will be able to take an increased income from 26 March.

Following the Autumn Statement, the limit on income that can be taken in capped drawdown has increased from 100% to 120%.

Drawdown allows retirees to keep their pension invested and take an income from it each year. The amount of income that can be taken from an income drawdown policy is based on calculations made by the Government Actuary’s Department (GAD), known as GAD rates.

These GAD rates are linked to the annuity rates offered by insurance companies, which have fallen dramatically. This meant that drawdown income falls and so the government decided to decrease the amount of income that could be take from 120% of the GAD rate to 100%.

After much outcry, however, the government agreed to increase the GAD rate back to 120%.

Draft legislation published yesterday indicates that the 120% limit will apply to drawdown years starting on of after 26 March 2013. However, investors currently in a drawdown year will remain on the 100% GAD rate until their new drawdown year starts.

A person aged 60 with a fund of £100,000 in drawdown currently gets £4,800 a year under the 100% GAD rates but will receive £5,760 at the 120% rate.

A 65 year old with £100,000 in drawdown will receive £5,500 a year under the 100% rate, increasing to £6,600 under the new rate.

Tom McPhail, head of pensions research at Hargreaves Lansdown, said although the changes are good news he recommended only taking an income that matches the return from the fund’s investments.

‘These proposals will help those who have suffered the double whammy of falling gilt yields and weak investment performance,’ he said.

‘This issue does show how important it is to moderate the amount of income taken from income drawdown. In my view, taking an income no more than the natural yield generated from the underlying investments is the optimum way to protect a drawdown fund over time.

He said income from a drawdown fund should be broadly taken at the same rate as an escalating annuity would pay out ‘to maintain the spending power of pension income over time’.

13 comments so far. Why not have your say?


Jan 18, 2013 at 16:07

It is time for the posh boys and millionaires at the Treasury to stop messing with draw down. They have had their cards marked and their knuckles rapped. The message to them is "go and play elsewhere or by 2015,you won't have a job!".

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Jan 19, 2013 at 11:08

I can see Mr McPhail's wisdom in suggesting that drawdown matches the natural yeld, but there is every advantage in running the fund down to prevent too much being taxed at 55% after death. So taking a little more would be an advantage.

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edward sutton

Jan 19, 2013 at 11:41

Tim McPhail s advise is not so clever. it leads to you leaving 85% of your money to the exchequer. So do what i do. take out the maximum . place any money not needed into a s&s ISA it will grow at the same rate as your SIPP you access to it at any time when your SIPP runs out you take TAX FREE income from your ISA and leave 100% to your wife/children

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Hole Puncher

Jan 20, 2013 at 09:17

Edward Sutton, thank you very much for your clear and concise explanation about how best to manage one's retirement income - very sensible indeed!!!

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A Gadsby via mobile

Jan 20, 2013 at 09:27

Totally agree with you, Mr Sutton

Far better to take out maximum drawdown (provided it does not take you into HR tax band!) and get more of YOUR money back under YOUR control

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Chris Clark

Jan 20, 2013 at 10:14

Adding to Edward Sutton's approach, which seems to be anathema to the Pensions industry, if one has one's wits about them, could SIPPholders do what he suggested, but then use 3 year or 5 year short annuities, and grow the SIPP to partially (or maybe even completely) offset the cost of the purchases?

Comments welcome...

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Duncan Nicholson

Jan 20, 2013 at 12:09

I have been doing the same principle as advocated by Edward Sutton by taking out the maximum since 2008 and buying max 5-year cash ISA's that are now returning an average of 4.6% tax-free and available for our use at any time.

However, the Government has reduced my drawdown by 52% such that more of my personally hard-earned cash can go to their coffers instead of my wife since they now take 55% instead of the agreed 35%.

I don't know where Michelle McGach gets her figures on the £100,000 drawndown pot, but if she looks at the GAD figures, they were 2% in December, 2.25% in January, and I see they are to be 2.5% in February 2013, so who is kidding her on that anyone on drawdown starting next month will get any more than 2.5%??

I wish there were more Edward Suttons in the world of finance.

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Jan 20, 2013 at 13:12

Edward is absolutely right - take as much as you can and if you are lucky to have a some spare cash, then squirrel it away to an ISA (but not a cash ISA!) - one each if you have a spouse. I would not bother with short term annuities - you are just throwing money into the Pensions Companies.

Was surprised with the advice from HL - but then they always have to tread very carefully. The idea of only taking the dividend income from your SIPP sounds laudable but just does not make sense on several fronts - as already pointed out. His advise would lead SIPP holders to concentrate largely on high dividend stocks. Over the years I have found that high divi stocks fall down on Capital Appreciation. Low div stocks more than make up for their lack of dividend.

Of course there are exceptions such as Aviva which over the past months has been making up lost ground - and Vodaphone which is now being tipped, to name just two. But mix in a good proportion of growth stocks from the ftse 250 and you will make far greater total return in the long run. It just means that every now and again you simply have to sell a proportion to extract your annual income.

By the way - I think Duncan has confused the gilt rates of 2.25 / 2.5% etc which are used to compile the GAD rates. Suggest visit for further info. This will show you the level of Capital required in the SIPP at each triannual valuation to maintian a required income. It does get better as you get older!!

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Colin Bennett

Jan 20, 2013 at 14:07

I currently restrict my drawdown so I don't pay higher rate income tax. If I spend a tax-year outside the UK, could I,during that year, draw the max amount permitted free of tax and invest as per Edward Sutton? I don't like to think of 55% of the pot going to our Westminster & Whitehall spendthrifts on my death when my kids are struggling with mortgages.

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terry shead

Jan 20, 2013 at 18:59

Which is the best drawdown company?

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Jan 21, 2013 at 09:43

Call me cynical here but are Hargreaves scared of people taking money out of their precious SIPP and them only having the lower balance to charge an AMC on?

Agree with the comments about taking max GAD where tax efficient to do so especially for older clients where health may start to become an issue.

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Blind Jack

Jan 21, 2013 at 10:35

Edward Sutton has exactly the right idea (all other things being equal). HL speak with forked tongue.

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Jan 21, 2013 at 11:54

The 55% tax rate seems to be misunderstood - unless I've got it wrong!

If you have a legal spouse, your SIPP fund is passed over free of tax, so you effectively have a 100% spouse's pension capability built-in. When the surviving spouse dies, then the 55% tax applies on any remaining funds.

So you can have the situation that a spouse "inherits" your SIPP, maybe has his/her own pension and can then get to flexible drawdown. Even at HRT rates it could pay to trash the SIPP in order to save the 55-40 penalty tax on survivor death.

Hope I've got that right - any comments welcome.

By the way, I fully support comments that McPhail is talking nonsense.

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