Capped drawdown was introduced as part of Government reforms to abolish compulsory annuitisation at age 75.
Following the changes, which came into force in April 2011, the maximum amount a person in capped drawdown can withdraw from their pension pot each year is equivalent to 100% of the GAD annuity rate. So the initial income generated by a level single life annuity and the drawings through capped drawdown are the same. The future drawings through capped drawdown is set tri-annually depending on gilt rates and the value of the pension fund (so investment performance is a key factor).
Last week the Association of British Insurers debated the issue as many have raised concerns about the potential of falling annual drawdown income.
Mark Hoban, Financial Secretary to the Treasury gave his opinion on this subject: “Whilst the Government reforms to extend and improve capped drawdown gives greater freedom, they do interact with the effectiveness of a fund manager’s strategy and gilt rates to determine the maximum drawdown. The Government appreciates that in the short-term, some of the other factors affecting drawdown rates may be combining with the change in the annual withdrawal limit to reduce individuals’ total drawdown income. However, the Government’s reforms are based on longer term considerations; we are confident that the reforms will improve flexibility and income sustainability for savers for the future.”
When considering the most appropriate route for your pension income, you need to consider current and future factors. Annuities have the benefit of a defined and known income, possibly for life or a fixed term; although in most cases may cease on the death of the annuity holder. Whereas capped drawdown provides an income directly from the pension fund and so future values can be volatile and could lead to either, an increasing or decreasing income; but on the death of the pension account holder the benefits can be received by the surviving spouse and possibly their dependants.
There are pros and cons to both and the intricacies need to be considered before making a decision, take professional advice to consider your options.
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