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%, in the maximum income withdrawal limit available to females.
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.
The table below shows the increase in maximum capped income for females from 21 December:
Pre 21 December
Drawdown fund £100,000 Post 21 December
Drawdown fund £100,000 % change
Age 60
Max income: £4,300 p.a. £4,600 p.a. 6.9%
Age 65
Max income: £4,900 p.a. £5,300 p.a. 8.2%
Based on gilt yield of 2%
This jump of around 8% p.a. will 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.
Adrian Walker, Skandia's pension expert, comments:
"The fact that HMRC has taken this step is an interesting move, and one which will significantly benefit females taking the capped income withdrawal route. Maximum income levels have been adversely impacted in recent months due to the record low gilt yield and volatile market conditions, so this will be a welcome relief for many females.
"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."
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