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This article provides our understanding of the Government Actuary’s Department (GAD) new rates. We feel this a major challenge that should be highlighted to those clients with pension investments that may be affected – with a view that advice and planning accordingly would be beneficial. If you would like to discuss this with Pearson Jones, then please do not hesitate to contact the writer in the first instance.
The 15-year gilt index yield used to calculate the maximum that can be taken under capped drawdown has plummeted over recent months and stood at 2.98 per cent as at 15 September 2011.
Therefore, the gilt-yield index will be rounded down to 2.75 per cent for those having capped drawdown calculated in October 2011, which is the lowest level since income drawdown was first introduced in 1995.
The change will hit all those planning to take income through capped drawdown for the first time, and particularly existing drawdown customers who flocked to income drawdown after A-Day in 2006 and are now facing their first mandatory reviews.
A 65-year old man entering capped drawdown in October 2011 would be restricted to taking a maximum annual income of £5,800 per £100,000 of pension fund, more than 30 per cent less than the £8,400 maximum in March this year.
A woman aged 65 will be restricted to £5,400, again nearly a third less than the £7,800 allowed back in March 2011.
A combination of factors is making this look like the perfect storm for those in income drawdown.
In April 2011, the Government made the limits tighter under its new capped drawdown regime and this was followed by new basis figures from the Government Actuary’s Department (“GAD”) that were also slightly less generous.
Since then the 15-year gilt index yield has fallen from 4.25 per cent to equal its record low of 3.25 per cent today, but for next month it will dive to 2.75 per cent, by far the lowest since income drawdown was introduced as a way of taking income.
This is against a backdrop of many pension funds that have lost value. At a time when annuity rates are at record lows, there is a huge squeeze on those who either want to start capped drawdown or who have been in drawdown and are facing an income cut at their next review.
The purpose of this article, therefore, is to make you aware of this position, which may affect you – particularly if you have been taking at or near to the maximum GAD income, since first going into drawdown.
Please let me know if Pearson Jones can assist you.
John Metcalf
Director of Wealth Management
Pearson Jones plc
