Pensioners with ‘capped drawdown’ pensions could find that they are hit hard in the pocket this summer as a consequence of a little-known change.
Under ‘capped drawdown’ arrangements, which were available until 2015, individuals were able to retain their full annual allowance of £40,000 on pension contributions, while drawing down their pension pot. Individuals drawing down their pension outside of ‘capped drawdown’ arrangements have their future pension contributions limited to £4,000 a year.
In return for this significantly higher allowance, people with ‘capped drawdown’ arrangements are limited as to how much they can withdraw each year from their pension savings. The level is determined by factors including the saver’s age, the overall value of the pension pot and, crucially, the yield on gilts – 15-year government bonds.
Under rules coming into effect next month, the existing minimum yield of two per cent used in the calculation of the withdrawal limit will be scrapped and there will be no minimum floor. This will potentially have a significant effect, as yields from government bonds have declined steeply in recent years to below the one per cent mark. In turn, pensioners could see their income fall by around 10 per cent as their maximum withdrawal levels are reduced.
Individuals who exceed their maximum withdrawal limit will be deemed to have moved to a flexible drawdown pension and loose the higher annual allowance permanently.