New drawdown rules offer good news for pensioners

Good news for the retired? The maximum amount pensioners can take from a pension pot will rise to £6,360 for each £100,000 saved from September - a 5.5% increase. A limited boost but the cap is partly about self-protection, ensuring pensioners do not deplete savings too quickly.

How much of a benefit is the move for many cash-strapped retired, practically?

Annuity angst

For some the move will be welcome. In the past the grey-vote were forced-marched down the annuity route, paid a fixed income every year for life. But with annuity returns so dismal, the opportunity to bypass this option must look attractive, keeping a pension invested in the stock market.

However, this route carries the risk that the value of their investment may slip, as markets rise and fall (the stock market has risen sharply since the beginning of July 2010; then the FTSE was valued at around 4,840; it's now valued at 6,474; that's a +33.8% lift).

Do the splits

One option could be to split the value of your pension pot, with half going towards a conventional annuity, with the remainder positioned for income drawdown. This mixed approach appears to carry the endorsement of financial advisers themselves. A survey by MetLife recently disclosed that just 10% of financial advisers would now commit themselves to a fixed annuity for life.

Meanwhile the UK pensions picture is deeply troubled on several fronts. Apart from the lack of meaningful competition between providers, despite the huge number of players, the latest noises from Bank of England governor Mark Carney last week indicated interest rates will continue to remain at historic lows.

Fees can frighten

Frustrating news for pensioners (annuity rates are generally closely linked to government bonds, in turn linked to the Bank of England base rate) already hard-hit by rising living costs. There's also, be aware, the risk of racking up higher fees if you opt for a drawdown product - annual management fees, admin charges, adviser fees, regular reviews. Etc.

If you're tempted to explore drawdown, it's advised you get clear guidance on the fees front. Bear in mind that while annuities may look a dismal option in your sixties, they often become better value the older you get, especially if you qualify for a better annuity rate because of health issues.

Seven retirement nightmares

Seven retirement nightmares

More stories