Retirees who use Income Drawdown to turn their pension into an income, rather than an Annuity, have been given a boost as rising gilt yields have increased the maximum amount of income which can be taken each year.
Income Drawdown is the traditional alternative to an Annuity purchase and allows the retiree to remain invested in a range of assets, often including stocks and shares, whilst drawing an income directly from the pension fund.
Income Drawdown rates rise
The maximum income which can be taken from an Income Drawdown fund is linked to gilt yields and is capped, to reduce the possibility of retirees completely eroding their fund.
At the end of 2012 yields dropped to 2%, causing hardship for many new retirees as they were forced to accept a lower maximum income than they had previously anticipated. However, in recent months yields have bounced back and it was recently announced the rate to be used during October is 3.25%.
This increase now means someone choosing to use Income Drawdown, will see the maximum level of income available rise to £7,320 each year for every £100,000 of pension fund. By comparison, when gilt yields were at their lowest, the maximum income available was £6,360; around £1,000 per year lower.
Existing Income Drawdown investors
Experts were quick to point out existing Income Drawdown investors will not be able to benefit from the increase until their next annual review; whilst anyone taking out an Income Drawdown plan in October will be able to take advantage of the higher rate immediately.
Despite the increase, which on the face of it would seem to be good news, retirees taking the maximum income should be careful not to erode the value of their fund by taking excessive levels of income. To maintain the fund value, an Income Drawdown investor would need to find a return equal to the income taken, plus any charges paid to the Income Drawdown provider as well as any adviser fees.
Alternative to an Annuity
Income Drawdown is typically seen as the main alternative to an Annuity, which turns a pension fund into an income for life and can never be changed.
The main advantage of Income Drawdown is that it can offer increased levels of flexibility in terms of:
- Income levels which can be altered to suit changes in your circumstances and are not set in stone as they are with an Annuity
- Investments which can be held in a wide range of assets including stocks and shares, funds, property as well as deposit accounts
- Death benefits, which can be paid as an on-going income, or a lump sum, which would be subject to a tax charge of 55%
However, retirees should be careful. Unlike an Annuity the income produced is not guaranteed and may drop as a result of falls in gilt yields. Furthermore the fund value could also fall if investments perform badly, which would also have a knock on effect to the income available.
Do you need retirement advice? Which option is right for you?
The all-important small print
You should remember that the value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.