The problem: A female client is unhappy with the low level of drawdown she has been receiving from capped drawdown. What are her options?
The solution: The new 20 per cent uplift in capped income withdrawals will come into force on 26 March, and people could start to see the benefit of this uplift from the start of their new income year following that date.
An income year is driven by the date a person first started taking income withdrawals from their pension. Whilst people do not need to take any action for this uplift to take effect, women could see their income rise by over 20 per cent as a result of the new gender neutral rules, but they need to take action to achieve this.
Changes to the maximum capped income calculation as a result of gender neutrality came into play on 21 December 2012. The factors that determine the amount of income withdrawals that men and women are permitted to take from their pension each year is now identical, which means the position for women has improved significantly.
To benefit from the new gender neutral rates, an income recalculation point is needed for women. This can be achieved in one of the following ways:
If the next scheme year requires a ‘statutory review’ of income it will trigger this potential additional increase automatically.
If the next scheme year does not trigger a statutory review, they should check whether their current provider offers an annual rebasis review facility.
If it does not, rather than wait for the next statutory review point, which may be some two years away, they may want to discuss with moving their investment to an arrangement which can provide that facility.
Alternatively they could consider topping-up their capped income withdrawal fund with unused pension savings or an additional contribution. Any new money added at that point will rebase the maximum annual income for the entire income fund, not just the new money moved across. This will only be beneficial where the new income level is higher than that which currently applies, so anyone considering this approach should seek advice before taking any action.
It could be extremely beneficial for women to take this action, especially if they need more income to live on. An example of how beneficial taking action could be is outlined below:
A female aged 60 with a £200,000 fund in capped income withdrawal with an income year starting 1 April 2012 could have received an annual income of £9,600.
This year, the same female, now aged 61, would receive a 20 per cent automatic uplift from the changes to the maximum ilevel allowed to £11,520 but by using the gender neutral uplift using annual rebasis review the maximum level of increase becomes £12,240 and increase of 28 per cent.
This calculation assumes a gilt yield of 2.5 per cent will apply to annual rebasis review.
As highlighted above, if a female triggers a recalculation point on her capped income pension, she could see her pension increase by 28 per cent, far greater than the 20 per cent uplift that will happen automatically.
The above figures assume that the capital value of her drawdown fund at April 2013 is the same as in 2012. If the capital value is higher the available increase will be higher, if lower then the increase available will also be lower, but will default to 20 per cent as a minimum.
Adrian Walker is head of retirement planning at Skandia