How much income can you ? and should you ? draw from your UK pension fund? Income drawdown is an alternative to buying an annuity at retireme
How much income can you ? and should you ? draw from your UK pension fund?
Income drawdown is an alternative to buying an annuity at retirement. Your pension savings remain invested, and you can draw down a percentage each year as income. There are limits as to how much you can take, and the rules tie maximum drawdown with annuity rates to prevent retirees from running out of money in their later years.
The rules as to how much you can take have changed twice in the last two years, and there is some speculation that they may change again next year.
In April 2011 the government capped income drawdown to 100% of Government Actuary Department (GAD) rates. Prior to that, the highest limit was 120%.
Annuity rates dropped to record lows because of falling gilt rates, and together with the lower income limit many retirees saw their pension income fall significantly. In December last year Chancellor George Osborne agreed to increase the income drawdown cap back to 120% of GAD.
This was confirmed in the 2013 spring budget, and from 26th March retirees can take 20% more income from their pensions from their next review date.
This forms part of the 2013 Finance Bill which will not actually be passed until July, so it is possible it will change again, though this is unlikely.
With annuity rates currently so low, the government has commissioned the Government Actuary?s Department to review the pensions drawdown table, and the underlying assumptions used to provide drawdown rates, to make sure they continue to reflect the annuity market.
Aviva has warned that this review could mean that the cap is reduced by 8% next April. Their pension expert, John Lawson, explained that ?the 20% uplift was only supposed to be a stop gap?, and suggested that retires could consider locking in a higher level of income at their next review in case the limit does change next year.
We do not actually know what will happen, and the 120% cap could remain in place. However, if 120% income is important to you, then you should discuss the matter with a wealth manager or your pension provider, while it is guaranteed.
Having said this, our advice is that you need to carefully consider various factors before opting to take the maximum possible income from your pension fund. While it can be suitable in some cases, in general it is not usually recommended. It may provide an income boost now, but the amount of income you receive will fall the longer you live.
You need to ensure you have a sustainable level of income right through your retirement. Drawing 120% of GAD rates on the whole only serves to exhaust your funds sooner where the investment returns are not sufficient to sustain capital. In turn, future income levels will fall.
The government changed its position when it came under significant pressure from the market as individuals saw their retirement income drastically fall. This means the responsibility now falls on the individual and their advisers to assess the suitability of taking higher income. Important factors to consider are:
- Investment performance, which cannot be guaranteed.
- Longevity – more people are living longer, and you may too.
- Inflation ? prices could rise significantly over your retirement years so you will need more income in future to maintain your standard of living, not less.
- Medical and long-term care costs.
In general, to reduce the risk of depleting the value of your pension funds, which would reduce your income levels, we recommend that no more than 100% of GAD is drawn or the natural yield of the underlying portfolio recommended if higher.
However, clearly there are circumstances where drawing 120% is much less of a risk, particularly for those with shorter life expectancies or who are confident they have sufficient capital elsewhere.
There are actually two types of income drawdown available. I have been talking about ?capped drawdown?, but ?flexible drawdown? is an option for those who meet a ?minimum income requirement?. In this case there is no limit to the amount you can withdraw or take as a lump sum. You would have to prove that you have annual pension income of at least ?20,000 from other sources, such as a lifetime annuity or state pension in the year in which you use ?flexible drawdown?. Non-pension income does not count, regardless of the value of your other assets.
It is essential that your pension decisions are based on your specific personal circumstances and objectives. You need to consider your likely life expectancy (as much as you can), the underlying portfolio, and what other wealth you have outside your pensions. You should also look at the tax implications in your country of residence and the UK, on the income, any lump sum and on death.
To ensure you have considered all the necessary factors and your options are carefully weighed, you should seek expert advice. Blevins Franks have pension specialists, tax specialists and investment specialists, all focused on the needs of British expatriates living in Europe.
23 April 2013
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