The Government has lowered the limit affecting how much pensioners who avoid annuities can draw down from their pensions as income.
The maximum income available from drawdown is calculated using tables prepared by the Government Actuary's Department (GAD). In recent years the maximum has been based on 120% of a comparable annuity but from 6th April the upper limit changed to 100%. At the same time as lowering the percentage limit the Government exaggerated the change by lowering many of the figures in the tables.
The GAD tables are based on gilt rates which are falling. In the middle of February they were 4.35%; they now stand nearer 3.5%. For those approaching retirement this year the combination of falling gilt yields, the amended tables and the new lower percentage limit will mean a reduction of several thousand pounds in their annual pension income.
For example a 55 year old man who started drawing a pension five years ago from a fund worth £300k (after payment of tax free cash) would have been allowed to draw a maximum income of £20,160. If their pension is still worth £300k then, at the beginning of next month their maximum income will be reviewed, based on the new GAD tables and rates, to £16,800 (a 17% reduction).
A J Bell Marketing Director Billy Mackay said: "The limits have been introduced to try to prevent people who do not have annuities from exhausting their pension pots before they die and ending life in hardship. But we see no evidence to suggest that this is happening.
"Advisers are always careful in explaining the investment risk of drawdown to clients. With some commentators forecasting gilt yields to drop as low as 2.75% by next year - not far off half what they were when this decision was introduced - then the Government should consider restoring the 120% limit to avoid the potential risk of creating hardship for pensioners.
"They are not reckless. Even with the markets in turmoil the biggest threat to pension income at the moment is not Greece but the combination of the drop in gilt yields and this new rule. For many of our clients it has significantly reduced their income in retirement and it's unnecessary."
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