Cash-strapped pensioners have received the news they have been waiting for – the green light from the government to draw more from their pensions.
Over 55s with pensions in drawdown will gain a few hundred pounds more in income – but spread over 12 months, even a 65-year-old with a £150,000 fund will pick up only £6.92 a week extra before tax.
The rise comes from a recalculation of pension drawdown rules by the Government Actuary Office (GAD).
The small increase means a lot to hundreds of thousands of pensioners who manage their income through drawdown instead of buying a fixed income annuity.
Having a pension in flexible drawdown means that pensions with an alternative income of more than £20,000 a year can self-regulate what they draw.
Flexible drawdown
The rest stays invested adding to the pension pot.
With an annuity, pensioners have to buy in to an insurance-backed contract that guarantees a fixed income for life.
Whereas a properly managed pension in flexible drawdown offers a variable income that allows a pensioner to take money as and when they need to spend and leave the rest in the fund.
Besides helping with investment growth flexible drawdown also helps wealthier pensioners manage their tax by letting them draw below the higher rate tax threshold of £32,010.
Drawdown lets a pensioner draw an income related as a percentage of income they could earn if the same money was invested in an annuity.
This is termed the GAD rate and is reviewed depending on age.
GAD rate
The government has confirmed the new GAD rate rises to 120% from October 2013.
Ray Chinn, of financial firm LV, explained the move was good news for pensions who had seen the GAD rate drop to 100% last year.
“For anyone nearing retirement that is not sure how to manage their finances or those already in drawdown, this is good news as their income is slightly higher,” he said.
“Annuities are giving poor fixed returns, and alternatives like drawdown and fixed term annuities offer a better chance to make more of their retirement savings. With such low interest rates and not much prospect of the changing much in the near future, drawdown offers a much more reasonable alternative.”
He also explained that making the right financial decisions at retirement is important, as locking into a lifetime product like an annuity is a decision that cannot be unmade once taken and anyone approaching retirement should look at how they can maximise their income.
