Many people approaching retirement will have to choose between taking their pension income through either an annuity or entering drawdown.

Drawdown is typically chosen by those with larger pension pots, who wish to have some control over how much income they receive each year. But it has become increasingly unattractive in recent years.

A combination of increasing life expectancy and falls in gilt yields attributable to quantitative easing have conspired to cut drawdown incomes.

This was worsened by the Government’s decision to limit annual drawings to 100 per cent of the Government Actuary’s Department rate in April 2011. The Chancellor has announced that this restriction will be removed from March 26 this year but many argue that further action is necessary.

One of the main benefits of drawdown is that it allows people to keep their pension fund invested while drawing an income from it.

However, with the prospect of investment growth in retirement comes the equal likelihood that poor stock market performance could see a drop in value.

Drawdown is therefore only suitable for individuals with a sizeable fund in excess of £100,000 and a willingness to take a risk with their investments.

Whether you opt for capped drawdown or flexible drawdown you will have the opportunity to take your tax free pension lump sum at outset – typically 25 per cent of the fund.

The main difference between these two types of drawdown concerns how income is taken.

In essence those who qualify for flexible drawdown (by meeting the minimum income requirement of £20,000 from other sources) will have no limits placed on their annual income.

On the other hand those in capped drawdown will take income in accordance with rates set by the Government Actuary Department (GAD).

GAD rates are largely determined by the yield on 15 year Government bonds which have plummeted in recent years to just over two per cent.

Prior to April 2011 the Government permitted a maximum income of 120 per cent of GAD, which provided a slight counterbalance against the falling gilt yields.

The decision to remove this uplift was understandably not greeted warmly!

The rationale behind the decision was that without this limitation people would drain their retirement funds too quickly.

However, for people who had diligently made pension contributions for their entire working life, this suggestion was a little insulting.

Poor stock market performance has not helped the situation but the removal of the 120 per cent uplift has been largely responsible for a 50 per cent fall in capped drawdown retirement incomes.

Five years ago a 65-year-old with a pension fund of £100,000 would have been eligible for a maximum income of £8,760 per year. Today the same person would have maximum annual drawings of just over £4,000.

The Chancellor therefore had little choice but to announce the reinstatement of the 120 per cent uplift in his autumn statement.

As a result of the change someone with a retirement fund of £100,000 will see their income rise from £5,500 to £6,600 per year, but many are arguing that further changes are needed.

The main thing to be aware of is that people currently in drawdown will not see an automatic increase in their income on March 26.

The new rules will only apply to new business applications and so those people yet to enter drawdown should wait until the end of the month to do so.

For people already taking a drawdown retirement income the uplift will not apply until the start of the client’s next pension year after March 25. For example someone who commenced drawdown on March 10, 2012, will have to wait until March 10, 2014, to get the higher limit.

The reintroduction of the 120 per cent limit was meant to address the drops in income suffered by those already in drawdown. It therefore seems strange that these people will have to wait more than a year to see any benefit.

AJ Bell chief executive Andy Bell has commented that “drawdown investors who have been frustrated by this drop in their income will question why they have to wait as long to benefit from the Government’s U-turn.”

Pension provider Standard Life has also called for the Government to address this issue and there is speculation that George Osbourne will use his Budget speech on March 20 to do so.

There are also concerns that some product providers will not have adapted their administrative systems in time to cope with the new rules. The uplift was announced at the beginning of December – leaving less than four months for the necessary changes to be made.

* Trevor Law is a director with Merito Financial Services, chartered financial planners, based in Solihull. E-mail: tilaw@meritofs.com