The announcement just before Christmas, by Chancellor George Osborne, that the maximum income available from Income Drawdown plans would be increased, took many people by surprise; the fact that HMRC are implementing the new limit from late March 2013 is perhaps even more surprising, as many industry experts thought it would take far longer for the change to be made.
Rising living costs, falling gilt yields and Annuity rate reductions mean the increase in the maximum amount available each year from Income Drawdown plans is on the face of it welcome news, but if you are invested in Income Drawdown, or are retiring soon and considering this option, should you rush out now and increase your income immediately?
We’ll get to that question in a moment, but first things first, what exactly has changed?
The maximum income you can take from your Income Drawdown plan is set by the Government Actuary’s Department, who calculate the GAD rate based on your age and the 15 year gilt yield. Following the implementation of the EU gender directive, your sex can no longer be used as part of the calculation.
Until the coalition government’s first budget, the maximum income which could be taken from an Income Drawdown plan was set at 120% of the GAD rate. However, Mr Osborne decided to reduce this to 100% in 2010, only to increase it back to 120% in November’s Autumn Statement, after calls for the change to be made following massive falls in gilt yields caused the GAD rate, and consequently, incomes to fall significantly.
The change in maximum income from 100% to 120% of GAD makes a significant difference as the table below, based on a fund value of £100,000, shows.
|Age||100% of the GAD rate||120% of the GAD rate||Difference|
HMRC has indicated that the change from 100% of GAD to 120% will be implemented from 26th March 2013; however the higher income level will not be immediately available to all.
A simple path to a higher income? So it seems
Whilst an increase from 100% of GAD to 120% sounds straight-forward enough, anyone who has had a pension for any length of time will know that life is never that simple. Indeed there has been some significant confusion over how the new rules will be implemented, although the fog now seems to be clearing.
Some original interpretations of the new rules led to the belief that the member would have to request a recalculation of the maximum income levels and that some Income Drawdown providers would not be able to accommodate this request. This would have led to a two tier system with some pensioners able to take advantage of the new maximum income levels, whilst others were left stranded at the lower rate. Furthermore there were initially fears that on requesting an income review current gilt yields would be used, which may be lower than when the maximum income was initially calculated and could therefore potentially cancel out any ‘gain’ from the movement to 120% of GAD.
Thankfully however the situation now looks far clearer and for once where pensions are concerned, far simpler.
Our understanding now is that the maximum available income will automatically increase from 100% to 120% of GAD at the beginning of the next drawdown pension year, which starts on or after 26th March 2013. Furthermore there is no formal or mandatory review at this point, unless of course one is due, meaning that the gilt yields and GAD rates applicable from the last review date will be used, which are likely to be higher than they are now and should therefore mean everyone can benefit from the increase to 120% of GAD.
Should you increase the income you take from your Income Drawdown plan?
So, following the changes and assuming of course they mean your income will actually rise, should you rush out and try and take more money from your Income Drawdown plan?
As with any financial decision it really is all down to your individual circumstances; this is a complex area and there are no easy answers. However, as a guide here are some reasons why you should and shouldn’t increase your level of income.
Reasons to increase your income:
1. After the cut from 120% of GAD to 100%, lower GAD rates (due to falling gilt yields) and rising prices, you are struggling to make ends meet and a rise in your level of income would help you to meet your monthly expenditure
2. You believe that investment performance will be sufficient to keep pace with the additional income you are taking from the fund and you have an attitude to risk that will allow you to invest in assets targeted at producing a sufficient return to maintain the value of your fund despite the higher income you are taking
3. Alternatively, you are happy to see the capital value of your pension fund decrease in the event that investment performance is not sufficient to ‘replace’ the additional income you are taking
4. You believe that Income Drawdown is still a preferable option to buying an Annuity
Reasons not to increase your income:
1. You are currently happy with the level of income you are getting and it is sufficient to meet your expenditure
2. You don’t want to increase the risk of your Income Drawdown fund falling in value due to the higher level of income you are taking
3. You feel that Income Drawdown is no longer appropriate for you and that an Annuity, or indeed another retirement income option might be more appropriate
If you are using Income Drawdown, or indeed plan to do so when you retire, now is a good time to meet with your adviser and discuss how the changes will affect you.
For those people who have been hit hard by falling incomes and rising prices the news that your income levels could possibly rise will be welcomed.
Our team of Independent Financial Advisers in Nottingham are experienced in developing retirement income strategies for clients the length and breadth of the UK. If you are approaching retirement and would like advice on your options call one of our IFAs today on 0115 933 8433, alternatively enquire online or email firstname.lastname@example.org