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The Small Print May Have Changed in your Pension

19 April 2017

The little-known changes Government have introduced only relate to people who entered "capped drawdown" contracts with their pension savings prior to April 2015. These arrangements allowed you to keep your pension pot invested into retirement, with the hope of added returns, while also drawing down an income. Capped drawdown was replaced by "flexible" contracts in April 2015 but those customers with existing contracts were allowed to continue.

One of the perks of capped drawdown is that savers retain the full "annual allowance" on pension contributions of £40,000 a year. This means they can continue to contribute up to £40,000 a year into their pension pot. Those not using capped drawdown but drawing down their pension pot are restricted to future pension contributions of only £4,000 a year. The Government allows people in capped arrangements to keep the higher allowance because there is a limit on how much they can withdraw from their pension in a year. This level is set by a combination of factors, including the age of the saver, the value of their pension and the yield on 15-year Government bonds or "gilts".

These Government bond yields have plummeted in recent years and fell to less than 1pc following the vote to leave the EU last summer. Until now, HM Revenue & Customers (HMRC) has had 2pc as the minimum yield used as part of the maximum withdrawals calculation. This has protected the incomes of people in capped drawdown.

"Many people will have seen their pots increase dramatically over the past year as stock markets have risen but because of the removal of the floor, a 65-year-old could see their pension income drop by around 10pc," warned Alistair Cunningham, of Wingate Financial Planning, an advice firm.

"You could move to a 'flexible' drawdown pension and ignore the fall in income but then you would be impacted by the reduced annual allowance for the rest of your life."

If you are under the age of 75 the maximum income you can take is reviewed at least every three years. Over that age it must be reviewed each year.  If your review date is set for after July then you could see your income cut. If your pension company allows it, you could ask for an annual or tri-annual review to be brought forward ahead of July to stave off the cut to income.

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