Planning pension income

Adrian walker highlights the potential opportunities for advice from the forthcoming pension income withdrawal changes on 26 March 2013.

In mid-January the Government announced a policy change to the calculation of the maximum annual income for clients in capped drawdown that starts to take effect from the 26 March 2013.

This is good news for many long-term drawdown clients who have seen their maximum annual income fall, in many cases significantly, as a result of a combination of falling gilt yields, uncertain investment markets, and earlier government policy.

However, when the 20% increase in maximum annual income will benefit your clients is not a simple message and provides significant opportunities for advice and the need to fully review the drawdown arrangements currently in place.However, when the 20% increase in maximum annual income will benefit your clients is not a simple message and provides significant opportunities for advice and the need to fully review the drawdown arrangements currently in place.

Not all at once

In summary the change will only impact, in the short term, clients who are currently in a three-year statutory review period, where their current maximum income will automatically increase from the start of the scheme income year that begins on or after 26 March 2013.

For those currently in a five-year statutory review, or whose next scheme income year starting on or after 26 March 2013 falls after their 75th birthday, the uplift in the basic maximum income will take effect from their next statutory review.

This change in income thresholds for many highlights the issue of whether they need to take income at the new, higher levels or whether they will initially continue with their current level of income. Increasing the level of income to the new thresholds does bring with it the prospect of a drop in income when their next statutory review falls due. The new maximum will be based on the gilt yield and capital value of their drawdown fund at the last statutory review date. If the capital value has eroded as a result of income withdrawals outstripping growth in the underlying remaining pension capital the next statutory review may still deliver a reduced future income entitlement.

Many income drawdown clients have contracts that have been in place for many years which do not provide the more flexible options now allowed by legislation such as optional annual rebasis reviews. Having these options available to clients can provide the ability to increase the normal maximum annual income at times other than a statutory review which may be nearly three years away.

The recent improvements in stock market performance, combined with the increase in 15 year gilt yields over the last two months or so, could deliver increases in income entitlements that will go beyond the automatic 20% increase provided by the change in Government policy.

Clients who could benefit from the use of either of these options are:

  • Female clients whose last income review fell before the changes were implemented to meet gender neutrality legislation on 21 December 2012. Any statutory or optional income review now will rebase their maximum income using higher male income factors which could generate an increase in maximum income that will go beyond the 20% increase.
  • Clients whose last review was over the last 12-18 months, or whose next scheme income year falls later this year. The recent increase in gilt yields, combined with clients being older could result again in a potential increase in their annual income entitlement that goes beyond the 20% increase.

A capital idea

The other key driver in income calculation is that of the capital value of the drawdown arrangement now compared with when the income was last calculated. For some clients, the recent stock market upturn will create real change to the drawdown income available from their pension savings form part of their ongoing retirement income planning. Similarly, if the capital value has actually fallen then, whilst they may benefit from the short-term increase of 20%, the longer term implications of a reduction in available income need to be considered in future income planning.

For a smaller section of clients, the option to use Flexible Drawdown may now be a reality. Being able to secure pension income, including State Pension benefits, of at least £20,000 a year will allow them freedom to access income from their remaining pension savings without the constraints that capped drawdown imposes. Additionally, existing State Pension entitlements will increase from the start of the next tax year helping reduce any shortfall on the £20,000 Minimum Income Requirement.

Clients being able to use part of their existing funds to secure any shortfall in annuity income will then have greater freedom as to how the remaining pension savings can be used as part of an overall retirement income strategy, alongside any other investments these clients may hold.

Further information

The Collective Retirement Account provides all of the flexibility required for pension income planning, offering both the ability to rebase existing capped drawdown income and Flexible Drawdown built into the contract.

Find further support material in Knowledge Direct on the impact of this change in legislation and the advice opportunities it presents for your existing clients who may be impacted and for any new clients in this area of the market.

The information provided in this article is not intended to offer advice.

It is based on Old Mutual Wealth's interpretation of the relevant law and is correct at the date shown on the title page. While we believe this interpretation to be correct, we cannot guarantee it. Old Mutual Wealth cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.

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