Thursday, 6 December 2012

Good news for pensioners – pension drawdown

Buried in the depths of the autumn statement was a small note stating that pension drawdown limits were changing from 100% to 120%. This effectively means a 20% increase in income for those who have suffered from a change in the rates and gilts and this is good news for many.

To explain:

For a male aged 65 the 2006 tables would have given him an income of £57 per £1000 of pension fund and then this would be increased by 120%. So on £250,000 the income would be assuming a gilt rate of 2.25%:

(£250,000 / £1000 x 57) x 120% = £17,100

The new rules changed the rate to £55 and set the increase to 100%. So using same assumptions the income would be:

(£250,000 / £1000 x 55) x 100% = £13,750

A drop of over 19%. In reality the drop was higher for many because gilt rates had fallen from over 4% to 2.25%.

The changes announced in the budget mean that we can now use 120% in the calculation which brings the income to £16,500 which is great news for many.

But the real winners are females and the EU gender rules.

The EU gender rules mean that for a short period females will use male rates. This means that where they were using £51 per £1,000 they go up to £55 per £1,000 meaning their current income goes from £12,750 to £16,500 (an increase of 30%). Effectively using the 2006 tables this would be equivalent to a 3% yield.

In summary some will argue this is not enough and perhaps the tables need to be reviewed but this is a big opportunity especially for females to increase their income to a more acceptable level. The other important aspect is that this was driven by a campaign where journalists, individuals and industry specialists came together to make it happen.

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