Women invested in drawdown pension arrangements should see a rise of around 8 per cent in the maximum income they can withdraw each year. The changes will come into effect from December this year and follow a European Union decision on gender rules, which states all insurance products have to be equalised between men and women.
The maximum withdrawal limits are set by the government to stop people using up their pension pot too quickly. As the rules stand, the capped income rates are calculated using two Government Actuaries Department (GAD) tables, one for men and one for women. These calculations differ because women have higher life expectancies than men and therefore need their pension pots to last longer.
However, HM Revenue & Customs has now decided to abolish the women's table and use male life expectancy rates for everyone.
For a woman aged 65 with a drawdown fund worth £100,000, the maximum cap is currently £4,900 a year. After 21 December, this figure will rise to £5,300 – an increase of 8.2 per cent.
This move is expected to increase the appeal of drawdown arrangements for women at a time when both the maximum income level, already cut by the government last year, and annuity rates are being hammered by all time low gilt yields, alongside volatile market conditions. But whether the change will benefit women in the long run is still unknown. Indeed, whether it offers much of an advantage now is also questionable.
Tom McPhail, head of pensions research at Hargreaves Lansdown, explains that drawdown is not a risk free option as taking the maximum income will most likely create a drop in fund value as investment growth struggles to keep pace with income withdrawals. "In recent months the maximum drawdown income limit has fallen below the rate of income offered from a level annuity, so for women this change in the rules means a mere redressing of the balance," he says.
However, Martin Bamford, chartered financial planner at Informed Choice, believes the new rules are good news against a backdrop of low gilt yields and the reduction to maximum income limits last year. But he warns: "Maximum income is unlikely to be sustainable over the long term although in the short term it could help to bridge an income gap."
Caution around maximum income is particularly important for women, who already have retirement incomes on average around a third less than their male counterparts, according to research by insurance company Prudential. If they are able to take a bigger annual slice of their pension pots – a tempting option given that economic conditions are already significantly suppressing incomes – they could put themselves at risk of depleting their overall investment too early.
"However, that's not the only risk," says Stephen Lowe, director at retirement solution provider Just Retirement. "Many of these products remain invested in the stock market, meaning customers are exposed to the rollercoaster ride their fund could endure. So these solutions are for more confident investors."
Getting the most in retirement
What should all retirees consider to achieve the optimal return from their lifetime's pension savings? Annuities, while offering predictability, are often maligned for being too inflexible. Mr McPhail says a more suitable comparator for a drawdown income may not be a level annuity, but an inflation-linked annuity as it mitigates market volatility and is aligned to the cost of living. He explains: "A 65-year-old woman today with £100,000 could expect to buy a level annuity income of around £5,823, or an inflation-linked annuity of around £3,500 a year. By comparison, under current rules, a woman could take a drawdown income of £4,900 a year. From 21 December, the maximum drawdown income limit will increase to the current male limit of £5,300."
For those whom drawdown is the most appropriate option, there are ways to squeeze more out of your investment. Mr McPhail says: "A good starting point is to consider drawing the natural yield from the drawdown investments – the dividends from the equities (see below) and the interest from the fixed-interest investments. This is likely to mean an income of around 4 per cent a year, and it is likely to be a sustainable, rising income."
Peter Carter, product marketing director at MetLife, believes many people considering drawdown may be more comfortable using products that provide a level of protection against difficult conditions. But Mr McPhail asserts investors can get the best of both worlds. He says an alternative is to combine annuity purchase with drawdown by splitting the pension pot 50/50 at retirement.
Mr Bamford takes this idea one step further. He says investors could use part of the fund to purchase an annuity, and then repeat this with the balance. This, he says, effectively hedges your bets about the future direction of annuity rates while providing greater certainty over income levels. "In most cases, investors would only do this twice – once with half the fund and then again within a year with the balance," he explains. "It depends to some extent on the size of the pension fund, as those with larger funds, say, £500,000 or above, might want to phase the purchase of an annuity across five stages."
Having to simultaneously juggle drawdown with annuities is a solution that might deter a lot of people. However annuity providers have been working to address this with more flexible products – although each variant comes with its own caveats. "New types of drawdown products such as fixed-term and variable annuities offer the flexibility of income withdrawal but with different types of guarantees," says Mr Lowe.
