24th March 2014
Hargreaves Lansdown will offer 150% income to new investors from 27 March with the income limit increased to 8.85% for a year. But the firm has warned that those who went into drawdown before 25th March 2013 may be limited to their current arrangement for the next twelve months.
Tom McPhail, head of pensions research says: “We’ve already had a number of new drawdown investors asking to take the higher level of income from Thursday so it is clear this is going to be popular. We will be able to pay the new income for new investors from 27 March. However existing drawdown investors will have to wait until their next policy anniversary; in some cases this may mean that they only get access to the 150% limit just before it is scrapped altogether next April.”
The firm says that anyone who went into drawdown on or before 25th March 2013 will currently be limited to 100% of the GAD rate. Anyone who set up a drawdown on or after 26th March 2013 will currently have a maximum income limit of 120% of the GAD rate.
In addition, from 27th March, investors will only have to demonstrate secure income of £12,000 a year (as opposed to the current £20,000) to be eligible for flexible drawdown. With flexible drawdown there is no cap on the level of withdrawals which can be made.
McPhail adds: “It is important for investors to remember that new income limits haven’t changed the fundamental principles of investing. If you draw the maximum income, you will probably run down your pension fund. Our default recommendation for an investor looking to take a sustainable, rising real income is to invest in a good spread of predominantly equity based funds and to take the ‘natural yield’ from the investments as income.”
“The natural yield simply refers to the income payments made from the underlying investments; dividends in the case of shares; the interest payments from bonds etc”.
The following table shows how income limits vary, depending on where the GAD (Government Actuary’s Department) limit is set (see below for a brief explanation of the calculation).
|Source Hargreaves Lansdown|
|Based on current month’s Gilt yields|
Drawdown limits and GAD rates
Drawdown income limits are calculated on a monthly basis, based on a combination of an investor’s age, that month’s 15 year Gilt yield and set of factors published in tables by GAD. Typically the 100% GAD rate was approximately equal to the income which could be paid from a level single life annuity. Once an investor has gone into drawdown, their income limit is set for the next three years at whatever the relevant GAD rate was for that month. They do however have the option to request a revised calculation once a year on their policy anniversary.