Under new maximum drawdown levels published for consultation, a person moving to an alternatively secured pension when they reach 75 could see a drop in maximum income of around 40%.
HM Revenue and Customs (HMRC) has released the figures proposed by the Government’s Actuary’s Department (GAD) for updating the tables used to calculate maximum income drawdown for both unsecured and alternatively secured pensions. The consultation will close on the 31st December
After A-day people in retirement who opt to receive income drawdown, or an unsecured pension, will no longer have to buy an annuity when they reach the age of 75. Instead they can continue with income drawdown under what will be called an alternatively secured pension, but with reduced maximum limits.
This changeover in the space of a year between the ages of 74 and 75 could see a person’s maximum income level drop by up to 40%, as limits for the alternatively secured pension have been made lower than the unsecured pension to keep withdrawals at a sustainable level which stop people over 75 from draining their funds and falling back onto means-tested state benefits.
For unsecured pension drawdown, separate figures have been presented for men and women which compare the current maximum to the new proposed regime covering all ages from 0 to 75 years old. Although there is only a small change, the figures do suggest that men will fair worse than women between the ages of 55 to 75.
The figures for men show the new maximum on an unsecured pensions will be lower for those aged 61 and older. By the time they reach 74 years of age the maximum drawdown level will be 2.6% lower than the current figures, while men aged between 55 and 60 will see a small increase on the current limit by up to 1.8%.
In contrast the new tables will have quite the opposite effect on women, as they should experience an increase of 8% at the age of 55, and will receive the benefits of an increase in maximums up to and including the age of 71. One of the biggest drops experienced by women is at the age of 74 when they will see the maximum they can withdraw fall by 1.2%, which is still over 50% less than the drop men are likely to suffer.
John Lawson, head of pensions policy at Standard Life, says: “Although the new figures are slightly less generous, it’s not going to have a huge impact or cause too many people, too many problems. It is the people that are going to continue to drawdown their fund and move into the alternatively secured pension that will get a big shock. People will have to start looking at their retirement options and start planning for that lower income, because a drop of 40% is going to make a big difference to their retirement.”
Andy Bell, actuary and managing director of the A J Bell Group commenting on the consultation paper, said the new GAD factors look eminently sensible, as they reflect more up to date mortality assumptions. He also added that with the maximum pension under the unsecured pension rules now being 120% of the new GAD rates, there will be little change in the maximum pension that can be drawn pre and post A day.
Although he did warn people they must realise the higher the pension they draw, the higher the probability it will be unsustainable, and anyone who chooses to continue with income drawdown when they reach 75 will get the extra flexibility but at the price of a reduced maximum pension level.
Bell continues "For anyone over age 75, the maximum annual pension under an Alternatively Secured Pension will be approximately 7% of the fund, which is 70% of the age 75 annuity rate. Anyone wishing to maximise their pension income after age 75 will still have the option of buying an annuity, although this will of course come with significant loss of capital protection on death."
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7968 4558 or email [email protected].IFAonline
Putting the tech into protection
Square Mile’s series of informal interviews
Fallout from Haywood suspension
Launching later in 2019
£80bn funds under calculation