5th March 2013
Three major developments over the last few months mean women using drawdown will be able to withdraw as much as 40 per cent more income from their pension fund, according to pension experts. Samantha Soames reports.
Alastair Black of Standard Life says a rise in the gilt yield, the implementation of the gender directive last December, and the restoration of the 120 per cent GAD (Government Actuary’s Department) limit have combined to make 2013 “a very important year for income drawdown.”
Sebastian MacKay of Standard Life Investment, explains: “The gilt yield used for drawdown is up from its lowest level of 2 per cent in December 2012 to 2.75 per cent now.”
“Gilt yields have also risen without the support of central bank purchases, as a reduction in euro break-up risks lead safe haven flows to dissipate and as doubts about the UK’s fiscal situation arise. We expect these trends to continue.”
The implementation of the 120 per cent rule is expected later this month after the reading of the Finance Bill (most likely after 22 March).
Laith Khalaf, a pensions analyst with Hargreaves Lansdown, says: “Basically women could enjoy a triple helping of good news when it comes to drawdown rates, the rise in gilt yields, the gender directive and the move to 120 per cent GAD are all positive for women.”
So who benefits?
Both men and women entering or about to enter a drawdown plan will be able to take up to 120 per cent GAD, up from 100 per cent right now and benefit from rising gilt yields. Existing drawdown investors can move to the new 120 per cent level from their next plan anniversary. Women will also get an extra boost from the gender directive.
Take Ms A, a 60-year-old woman with a drawdown pot worth £100,000.
On 1 December 2012, she would only have been able to take £4,300 income a year. But the implementation of the gender directive on 21 December 2012, and rising gilt yields, mean that if reviewed on 1 March this year up to £5,100 could be taken, that’s an increase of
18.6 per cent.
Combined with a increase in the GAD limit, from 100 per cent to 120 per cent, the yearly income allowed rises to £6,120, an increase of 42.3 per cent on their 1 December 2012 limit.
What to do next
Drawdown investors need to shop around. Khalaf says: “Some drawdown schemes are eye-wateringly expensive and both new and existing drawdown investor should pay attention here because unlike an annuity, a drawdown plan can be switched to a new provider.”
Khalaf points out that the 120 per cent limit is a maximum level. He urges drawdown investors to give thought to whether this is a sustainable level of income. By taking the maximum limit an investor may deplete their pot too quickly. However he says the rise in the gilt yield alone will help pensioners.
“By taking the natural yield of their investments, the dividends and interest payments, drawdown investors can take a reasonable income from their plan while maintaining their capital to be drawn down at a later date.
One other thing to note is the positive effect of the gender directive may not last for ever.
“Last December when the directive came in the Treasury moved female rates up to match male rates- this means no change for men and a rise in rates for women. They adopted this position while they monitor the annuity market’s reaction to gender neutral rates- we should
not be surprised if at some point they trim rates back a bit to reflect combined male and female life expectancy.”
Future of drawdown
Standard Life along with other providers is urging the government to do more to improve drawdown rates and put them on a par with annuity rates. It has a number of suggestions
1. Base pension drawdown limits on a combination of gilt & corporate bond investments.
Standard Life said this alone could give a 60 year old 15 per cent to 20 per cent more income.
2. Round up, not down.
Rounding the yields used to calculate pension drawdown rates up to the next 0.25 per cent, not down could add another 3 per cent or 4 per cent income.
3. Introduce a 3 per cent floor on the yield used to calculate drawdown limits.
This safety net would have reduced volatility and protected consumers against market extremes in 2012.
4. Average yields over six months.
Rather than basing pension drawdown rates on security yields on a single day each month, they could use average yields over six months.
5. Introduce enhanced drawdown rates for impaired lives.
Introducing special drawdown rates for customers with reduced life expectancy puts annuities and drawdown options on a level playing field – helping to create fairer choice for consumers. Those affected would receive a higher retirement income, reflecting their
circumstances and needs.