Pensioners income drawdown rates are going up – but many may have to wait a year or more to benefit from the extra cash.
The government has announced that the 120% GAD rate will be reinstated on March 26, 2013 – but this could leave many savers having to wait until March 2014 to benefit.
That’s because a mid-term review of a pension is only effective from the first day of the pension year.
That means that someone with a review date of March 25, 2013 will have to wait until March 26, 2014 to benefit from the drawdown increase.
Andy Bell, chief executive at pension provider AJ Bell, said: “It would have suited pension savers if pension providers could disregard the 120% to 100% reduction in 2011 then all investors taking a drawdown would benefit immediately from this relaxation.
“Instead, for many it will be more than a year before they could benefit from the change.”
Investment drawdown is an effective way for a pensioner to not buy an annuity, especially with rates at all-time low. Instead, they can opt to draw a capped annual income from their pension pot.
The amount of a drawdown is calculated by the Government Actuary Department (GAD) which works out a figure that is linked to the yield on government 15-year bonds, which also influence annuity rates.
Unfortunately, the yield on gilts has fallen in recent years to an historic low.
This drop has led to pension experts urging retirees to shop around for better annuity rates rather than take those offered by their pension providers.
By using drawdown, a pensioner has an alternative option of having an income before they find an annuity rate – which is then set for life.
QROPS and GAD
Fund manager MGM Advantage has calculated that annuity rates have fallen by 21.6% in last three years.
The GAD drawdown figure also affects those expats with Qualifying Recognised Overseas Pension Schemes (QROPS).
Those expats who have placed their pension pot in a QROPS scheme within the last five years will, generally, follow the GAD rates which means some will be affected by the 100% issue for a year or so yet.
Those who moved into a QROPS more than five years ago can opt to follow the rules applicable to the financial centre where their pension is based – in some cases this means that they can already drawdown 120% of their pension pot – and some financial centres may pay more.