However, the other variable that affects income is the value of the pension fund and with stock markets around the world continuing to fluctuate, it is possible for people to use this to their advantage. If they hold back and don’t put their entire pension fund into income drawdown all in one go, they can potentially wait for markets to improve or gilt yields to increase and phase the rest of their pension pot into drawdown to gain a significantly higher income.

The 15 year gilt yield plays a crucial role in determining the level of income pensioners are able to take, as does the size of a person’s pension fund, and age related income factors provided by the Government Actuaries Department. The yield has been in steady decline since April 2011, and, as announced earlier this week, it has now fallen to a new record low of 2.25% for those entering income drawdown in February.

This decline will have a real impact on those who are now considering the use of income withdrawal or annuities to provide retirement income. It will also affect those already in income withdrawal if their maximum income becomes subject to a statutory review in the coming months.

There is one simple way in which someone can potentially achieve a higher income from their pension. When they go into drawdown, they should ensure they keep some back, even if it’s just a small amount. They should then wait for stock markets and/or gilt yields to pick up, which could mean waiting a few months, or in today’s volatile market, could mean waiting just a few days, and then put that amount into drawdown.

When new monies are moved into drawdown, the revised maximum income is applied to the entire amount in drawdown, provided the pension scheme allows it. This could help raise overall income levels substantially for the remainder of the statutory three year period before the maximum income has to be recalculated.

For example, the calculation below shows what a difference holding back just £1,000 from a £100,000 pension fund could make. The figures assume a person takes a 25% tax-free lump sum, leaving the balance to move into capped drawdown. In scenario 1, all the pension fund is moved into drawdown on day 1, in scenario 2 £1,000 is held back and either fed into drawdown at the end of October, the end of November or the end of December 2011. It assumes that no income was taken in the intervening period and the initial drawdown fund growth mirrored the FTSE 100 index.

Maximum income calculations based on male age 60.

As the figures show, if the remaining £1,000 was moved into drawdown at a later date, they would have received £250 of that amount as an additional tax free cash sum, and the maximum available income would have increased. At the end of October, there would have been an increase in overall income of £350 p.a. but if it was drip fed in at the end of November, income would have increased by £483 p.a.

Based on this week’s changes in gilt yields, if the extra £1,000 was to be drip fed into drawdown in February, maximum annual income would be £3,994, an increase of £169 compared to the beginning of October even though gilt yields will have dropped significantly to 2.25%.  This is assuming growth in the underlying fund since October based on a FTSE 100 level as at close of markets on Friday 13^th January 2012 of 5637.

Care should be taken when considering this type of retirement income planning. If the additional £1,000 is drip fed into income drawdown when conditions are not favourable, i.e. gilt rates or investment markets have fallen further, it could have a negative impact on maximum income levels.

Adrian Walker, Skandia’s pension expert, comments:

“When a person reaches retirement, all too often they take their maximum tax-free cash lump sum, which means the entire fund goes into drawdown. They may or may not then take an income with the remaining fund. People need to be aware of the advantages keeping a small lump sum in their pension can have when they come to drawing an income from their pension.

“Holding a small amount back, and drip feeding it, possibly on a regular basis, into drawdown could increase a persons chances of raising their overall income level if stock markets or gilt yields improve. Importantly, the entire pension can benefit from any improvement in maximum income calculations if the pension arrangement is structured in this way. This can give hope to those who cannot wait for gilt yields to improve before they start to take an income from their pension. Not all pension contracts offer this flexibility, so people need to check with their provider what options they have, and seek professional advice from their financial adviser.”