Join our community of smart investors

Drawdown investors welcome U-turn on income limits

The chancellor surprised the pensions industry by restoring the higher capped drawdown income limits that he withdrew in 2011
December 6, 2012

The gloom surrounding the reduction in pensions reliefs was offset to some degree by the chancellor's surprise restoration of the capped drawdown income limit.

Saying he had "listened to concerns from pensioners" he announced that the government will raise the capped drawdown limit from 100 per cent to 120 per cent of the Government Actuary's Department (GAD) limits, "giving pensioners with these arrangements the option of increasing their incomes".

The government reduced the limit from 120 per cent of GAD to 100 per cent only 18 months ago, in April 2011. The u-turn in restoring the income limit flies in face of Treasury warnings about pensioners exhausting funds.

As usual the devil will be in the detail and it remains to be seen when this will happen (hopefully immediately) and whether the limits for those aged over 75 will once again be reduced down to only 70 per cent of GAD. Another question is what happens to people who have already been caught by the 100 per cent GAD level.

Andy Bell, of AJ Bell which was lobbying for a proper debate around income drawdown, says the announcement "smacks of a late addition". He says the government has said it will now have a "discussion with the industry" as to how and when to implement the change.

Several parties had been lobbying for the GAD limit to be increased as record low gilt yields and other market forces conspired to give income drawdown investors unbearably low drawdown limits.

Investors in drawdown have their income limits reviewed after five years and then every three years. At reviews in 2012, the reduction in the GAD limit has seen maximum withdrawal levels fall by close to 50 per cent in most cases and more than 50 per cent in a few.

Figures from Standard Life suggest the move back to 120 per cent will mean a 65-year-old with a £100,000 pension pot could see their maximum drawdown income increase from £5,300 to £6,360.

Ray Chinn, LV= head of pensions says: "The change to the drawdown limit is good news, especially for those customers who have been badly hit by previous reductions. However, we would still advise caution, and urge people to take advice around the sustainability of income levels in drawdown, and to look at the wide spectrum of products available in the retirement income space."

Ian Naismith, pensions expert at Scottish Widows, says: "We welcome the increased drawdown limits, but again it's regrettable that the government has created complications by reducing the limit only to increase it again within two years."