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Why some women can expect a 40% pension income boost

Women drawing down a pension from their savings are benefiting from three changes to how retirement incomes are calculated.

Why some women can expect a 40% pension income boost

Women who 'draw down' a pension direct from their savings to avoid buying poor value annuities are reaping the benefit of three changes that could increase their incomes by as much as 40%.

Pensions drawdown is an alternative to buying an annuity, which is a life insurance contract bought with an individual's pension savings. The amount of pension a person gets depends on how much money they have and the level of annuity rates. Annuity rates have plunged in the past decade, making annuities unpopular. 

Under drawdown retirees keep their pension pot invested and take an income from the money. However, there are strict rules about how much income can be taken and the level, which is linked to annuity rates, is set by the Government Actuary’s Department (GAD) and is known as the GAD rate.

The level of income that can be taken in drawdown is reviewed at least every three years and the income recalculated depending on the current rules. The level can be reviewed earlier on request.

The first of the three changes is an increase in gilt yields, or the interest rate paid on UK government bonds. These are used to calculate how much income can be taken from a pension pot. Until recently gilt yields had fallen for many years but have now edged up from a low of 2% to 2.75%.

Secondly, the GAD rate is also increasing from 100% to 120% on 26 March. The GAD rates are linked to annuity rates offered by insurance companies and as the annuity rates fell dramatically, drawdown income fell and the government decided to decrease the amount of income that could be taken from 120% of GAD to 100%. However, after much outcry the government has reinstated the GAD rate to 120% from next month.

Both these changes will boost income drawdown for men and women but female pensioners will also benefit from the implementation of the gender directive, which came into force on 21 December 2012.

It states that gender can no longer be used to discriminate when it comes to insurance policies or GAD rates. Women tend to receive less pension income than a man of the same age and with the same level of savings because females live longer and have to make the money stretch further. However, this will no longer be a factor in the level of pension income taken from drawdown and women’s pension income will be equalised with men’s.

Figures from Standard Life show these changes will lead to a significant increase in income for women. A 60-year-old female with a pension of £100,000 in drawdown could only take £4,300 of income a year.

However, on 1 March following the gender directive and gilt yield increases, an income of £5,100 can be taken. This increases further when the new 120% GAD rate is implemented on 26 March to £6,120 a year – a boost of 42% on the 1 December limit.

A male of 60 with a £100,000 pension would have been able to take an income of £4,600 on 1 December 2012 but this increases to £6,120 on 26 March – a boost of 33%.

Alastair Black, Standard Life head of customer income solutions, said: ‘The increasing gilt yields and the restoration of the 120% GAD limit is heartening news for those in drawdown – especially women.’

3 comments so far. Why not have your say?

Paul Eden

Feb 28, 2013 at 22:24

Should not those with impaired health, in a group of people whose life-expectancy is reduced, have the same rates of annuity as those in good health?

Isn't this the logical extension of the new discrimination against men, who as a group have shorter life-expectancy than women, but are being compelled to accept the same annuity rates?

If a shorter life-expectancy for one group does not entitle those in that group to higher annuity rates than another with greater life-expectancy, shouldn't this be the norm? How can we differentiate between people in poor health and men and those in good health and women?

Whatever policy is chosen, it should apply equally in all circumstances - shouldn't it?

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Mar 01, 2013 at 08:57

Absolutely right Paul. Sensible pooling of like risks for any assurance/insurance purposes has been completely undermined by this extension of the Equality agenda to cover gender issues. The same thing applies in any area where quotas are applied for political purposes. Any structure/organisation sentenced to apply quotas loses credibility and deteriorates. Parliament and education being two classic cases.

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Mar 03, 2013 at 13:00

I transfered 3 pension funds to a SIPP in January and indicated I wanted to maximise capped drawdown. The platform informed me of a "pension commencement date" in Jan. A week later I became aware of the increase in GAD to 120% and asked for this to be applied to the drawdown which had yet to occur. They told me I couldn't because the pension commencement date had been set (without consulting me).

Am I entitled to secure a GAD rate of 120% with drawdown in March?

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