If you’re either contributing to a pension or drawing income from your nest egg, you may need to take urgent action to maximise opportunities.

Income drawdown opportunities: boost your income while you still can

Income drawdown from a self-invested personal pension (Sipp) has become more popular in recent years because the alternative, income from annuities, has been deteriorating for decades. 

Current drawdown rules allow you to take more income out of your pension than will be possible under the new regulations taking effect in April, and many investors under 75 will therefore want to take advantage of the current maximum income before it is slashed. 

The most an individual taking an unsecured pension can draw each year is 120 per cent of the projected annuity – calculated using their fund value, age, sex and the gilt yield – which you will see expressed as the Government Actuary’s Department rate.

From 6 April, individuals will only be able to take 100 per cent of the relevant annuity calculated using the GAD rate. That is a big difference. For example, currently a male aged 65 with a fund valued at £100,000, referencing a gilt yield of 4 per cent, can take up to £8,160 in income a year; but from April the maximum income he could take drops to £6,800.

From April, individuals will also need to recalculate their income limits every three years instead of the current rule of every five years; but anyone who is already taking an income will be governed by the current (120 per cent) rules until their next income recalculation, so it might therefore be worth squeezing in a recalculation ahead of April so that your current basis can be used longer. The exception to the three-year rule is if you turn 75 after 5 April, when it must be reviewed annually from the review following your 75th birthday. 

‘The government’s announcement that the maximum income available via income drawdown will fall from April 2011 may see individuals bringing forward their decision to move into income drawdown,’ says Steve Latto, head of pensions at Alliance Trust Savings. 

‘Not only will they secure a higher potential maximum annual income, but their limit will not need to be recalculated for another five years. These two factors could result in an income drawdown boom in the first quarter of 2011.’ 

Changes from 6 April at a glance

The current types of income-drawing arrangement will be abolished and replaced by the simple term ‘drawdown pension’, of which there will be two types – capped and flexible.

To qualify for flexible drawdown, you must have a secure income stream already in payment of £20,000 per year or more.

Under capped drawdown, the maximum annual income will be based on a Government Actuary Department calculation of 100 per cent of the relevant annuity, instead of the current 120 per cent – a big drop.

Your GAD maximum will be reviewed every three years up to age 75 and annually thereafter.

Drawdown is available from age 55 (or earlier for those with a protected pension age) with no upper age restriction.

If you die after starting to draw an income from your pension, any remaining pension fund will be taxed at 55 per cent, regardless of your age.

Until age 75, there will be no tax charge on death for undrawn funds and a lump sum can be paid to your beneficiaries. After age 75, undrawn funds will be taxed at 55 per cent on death, but ring-fenced from the rest of your estate.

This article is an abridged version of one in the March issue of Money Observer