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Drawdown income limit to return to 120%

George Osborne 480

Chancellor George Osborne has announced a dramatic U-turn and restored the drawdown income limit to 120 per cent of GAD.

Capped drawdown was introduced as part of the Government’s reforms to abolish compulsory annuitisation at age 75.

Following the changes, which came into force in April last year, the maximum amount a person in capped drawdown can take as income was reduced from 120 per cent of the equivalent GAD annuity rate to 100 per cent. This, coupled with plummeting gilt yields, has dramatically reduced the income that savers are able to take each year.

Giving his Autumn Statement speech last week, Osborne said: “I have listened to concerns from pensioners about drawdown limits.   

“I am today announcing that the Government will raise the capped drawdown limit from 100 per cent to 120 per cent, giving pensioners with these arrangements the option of increasing their incomes.”

Pension provider A J Bell says it has been told by HMRC representatives that the change will require legislation. Draft legislation will be produced before the next Budget, although the actual date of implementation will depend on the outcome of discussions between Government officials and the industry.

Figures from A J Bell suggest the move back to 120 per cent will mean a 65 year old with a £250,000 pension pot could see their maximum drawdown income increase from £13,250 to £15,900.

The Association of British Insurers had proposed an alternative solution which would involve changing the way the GAD maximum is calculated by using a mixture of long-term corporate bond yields and long-term gilt yields, rather than the 15-year gilt yield currently used.

Others in the industry called for a more radical review of the current drawdown regime.

Radcliffe & Newlands chartered financial planner Mel Kenny says: “The increase in the GAD limit was needed because people in drawdown have suffered huge falls in income.

“In my view the Government should keep the GAD rate under review rather than pursue further wholesale changes.”

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