Drawdown rule changes could cost pensioners

New regulations are likely to hit hundreds of people on flexible incomes, says Sarah Davidson

Pensioners taking income drawdown could see hundreds of pounds knocked off their annual income as soon as April next year. The news that yet more changes are in store for people opting to draw a flexible income out of their pension pot will come as a blow, as the Government has already chopped and changed the rules twice in the past two years.

A 65-year-old male with a £100,000 pension pot who agreed his drawdown rate before 26 March this year generates £5,800 of income a year. In January, the Government confirmed that anyone agreeing income drawdown after this date would be eligible for 20 per cent more income and could take £6,960 out of their pot each year.

But an official Treasury review of drawdown which has just started could see this uplift fall back by 8 per cent next April according to Aviva's pension expert John Lawson.

"This 20 per cent uplift was only supposed to be a stop gap. People should think about locking into that higher level in the next year just in case the Government does decide to drop the maximum back down."

The review is of government-set rates used by pension providers to determine how much income people can take each year and has been prompted by rock-bottom annuity rates and low gilt yields.

Pensions expert Ros Altmann says reversing the uplift as soon as next year would be "outrageous".

"The whole point of this was to give people who don't want to have to buy an inflexible and poor-value annuity the choice to take more of their savings when they want to," she says. "The Government already imposes too many restrictions on how much they can withdraw through income drawdown. Cutting this further would be a disaster."

Other pension firms say there is no guarantee the Government will change the rate again but admit it's worth speaking to your financial adviser or provider in the next year to see whether you should lock in to the higher annual allowance while it's available.

"There's nothing to lose by opting to review your income on your next drawdown anniversary and take advantage of the new maximum if you want to," says Richard Bean from AWD Chase de Vere.

The maximum is calculated as 120 per cent of the equivalent income generated by taking a single life annuity, which would lock you into a fixed monthly income for life. Opting for income drawdown means you can decide how much you take and when – up to this limit.

But Prudential's Vince Hughes-Smith urges caution. "People need to think about a sustainable level of drawdown income rather than the maximum," he says.

Andrew Tully, a pensions expert at MGM Advantage, warns that even with the 20 per cent uplift available this year people should still brace to see their incomes fall if they haven't reviewed in a few years.

He calculates that in an average situation where a fund has seen a 5 per gross return since 2008, anyone opting for the maximum allowance this year would still suffer a 35 per cent drop in annual income because rates have fallen so much.