Why has the Income from my Income Drawdown Contract Reduced?

Income Drawdown (also known as an unsecured pension) allows you to take income from your pension fund while the fund remains invested and continues to benefit from any fund growth.

There is no minimum amount of income that must be drawn, irrespective of age. This means that you may be able to leave your pension fund untouched for as long as you like, without the necessity to drawing any income.

Changes from April 2011 meant that:

• The maximum amount of income that may be drawn was reduced from 120% to 100% of the single life annuity that somebody of the same sex and age could purchase based on Government Actuary’s Department (GAD) rates.

• The period over which the maximum income will generally be reviewed was reduced from 5 years to every 3 years until age 75 and annually thereafter, based on the GAD rates for an individual of the same age at the time of each review.

• Tax-free cash lump sums may now be paid after age 75 where an individual has elected to set aside or ‘designate’ funds for income drawdown at the same time, even if they decide to take no income.

Therefore, previously as a drawdown investor you could draw approximately 20% more income than an annuity will pay. Whilst this higher income was advantageous at the outset, it was unlikely to be sustainable unless investment returns exceeded the drawdown rate.

Example: Previously the maximum drawdown for a man aged 60 with a £100,000 fund was £7,200 gross per annum. After April 2011 the maximum income reduced to £6,000 gross per annum. Today, these rates show that the maximum income limit for a man aged 60 with a £100,000 fund has now reduced to £4,900 gross per annum. Or to obtain the £6,000 gross per annum as detailed above he would now need to be aged 67.

Therefore if you were previously receiving an income through drawdown for the past 5 years and have received your review documents they are likely to show a reduction in your maximum annual income.

Why: Unfortunately, a few factors have worked against you since you started drawdown. Notwithstanding the changes detailed above that came into force in 2011, the GAD tables for calculating income drawdown rates which reflect the above changes and are based on medium-term gilt yields and reflect changes to the GAD’s assumptions on longevity. Consequently, GAD rates themselves have reduced and are continuing to reduce on an almost monthly basis at present.

As GAD rates change in line with other factors (specifically gilt yields), it could be that they will increase again in the future. If your drawdown policy is one that allows member-nominated reviews, it might be possible for you to request another review as/when the rates improve, which would increase your maximum income although probably not to the levels you have enjoyed previously.

Another option would be to take your remaining pension fund and buy an annuity. This would provide you with a guaranteed income for the rest of your life. However, annuity rates are also very low at present and the reasons you chose the drawdown route over annuity purchase previously may still stand.

All of these points and more are covered as part of our Ongoing Review Service. If you would like to know more, please contact us with no obligation on 01626 833225.

The above comments do not constitute financial advice and you are advised to obtain appropriate professional advice before proceeding further.