Females could see a jump in pension income from 21 December
HM Revenue & Customs (HMRC) confirmed recently that gender neutral income factors will apply to capped income withdrawals. From 21 December 2012, the rates used to calculate the maximum amount of income a female can take from her pension each year in drawdown will be based on male life expectancy rates.
This could result in a significant increase, of around 8 per cent, in the maximum income withdrawal limit available to females.
Maximum capped income rates
Currently, maximum capped income rates are calculated using two different tables, one for males and one for females. As males tend to have a lower life expectancy than females, the amount of income males can withdraw from their pension has tended to be higher than for females. HMRC has decided to withdraw the female table, so all calculations, from 21 December, will be based on the male life expectancy rates.
Increase the appeal of capped income withdrawal
This jump of around 8 per cent per annum may help increase the appeal of capped income withdrawal at retirement for females. Annuities are also caught by the gender neutral rules, and life offices are responsible for adjusting their calculations accordingly. How this will play out in the market is yet to be seen, but the rates are likely to gravitate towards the female rates rather then towards the male rates, so females are unlikely to see any significant improvement in annuity terms.
The fact that HMRC has taken this step is an interesting move, and one which could significantly benefit females taking the capped income withdrawal route. Maximum income levels have been adversely impacted recently due to the record low gilt yield and volatile market conditions, so this should be a welcome relief for many females.
Choosing a provider with flexible review periods
Females already taking a capped income can benefit from this rule change at their next review period. Females approaching retirement today, and considering capped income, should ensure they choose a provider with flexible review periods, or hold back some pension money to top-up their drawdown fund after 21 December, so the entire income amount is recalculated to benefit from the rule change.
All figures relate to the 2012/2013 tax year. A pension is a long term investment the fund value may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.