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Retirees in drawdown pensions braced for 30% income drop

Income from pension 'drawdown' arrangements, an alternative to annuities, could be reduced as much as 30% if gilt yields push lower.

 
Retirees in drawdown pensions braced for 30% income drop

Retirees in 'capped drawdown' pension arrangements, an alternative to annuities, could see a reduction in income of up to 30% as falling gilt yields, poor stockmarket returns and changes to the government’s calculations weigh on their savings.

Pensioners coming up to their compulsory five year capped drawdown review, when income is recalculated, are most at risk of seeing a reduction in their income, according to Rowanmoor Pensions. 

Around 300,000 people are currently in pension drawdown arrangements, with up to 75,000 coming up to their five year review.

Capped drawdown replaced unsecured pensions last year and allows those coming up to retirement to leave their pension invested and take a yearly income from it, as an alternative to buying an annuity. The amount of income you can take each year is capped and the amount you can take determined by the Government Actuary Department (GAD), which produces tables of annuity income rates.

The GAD rates were reduced last year to reflect people's increasing longevity and those in capped drawdown can now take a maximum income of 100% of the GAD rate, compared to the previous GAD rate of 120%.

As GAD rates are calculated on gilt yields, the further round of quantitative easing (QE) seen last week will push gilt yields and therefore annuity income rates down further, meaning the amount of income capped drawdown pensioners can take will reduce.

‘When you drill down into the detail of the figures, you realise just what a shock pensioners coming up to their five year compulsory capped drawdown review are about to face. Their desire for well-funded retirement is sadly about to go out the window,’ said Rowanmoor Pensions head of pensions technical services Robert Graves.

‘Pensioners currently undergoing their five year reviews are seeing their incomes further reduced by the fall in gilt yields from 4.5% in February 2007 to 2.25% in February 2012. This fall in gilt yield reduces income by over 20% per annum.’

He added that if the latest round of quantitative easing drives the gilt yield to 2%, income would be reduced by 30%.

Despite income being impacted Graves said drawdown arrangements would become more popular, following the abolition of the rule making annuitisation compulsory at age 75 and the need for more flexible income in retirement.

19 comments so far. Why not have your say?

S-ville

Feb 16, 2012 at 11:11

Flexible Drawdown might be one solution.

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martin hargan

Feb 16, 2012 at 13:01

Yes and the announcement of reduction did not leave us with sufficient time to reflect and make sure we retained the 120% rate. Who's looking after us Ombudsman etc ?

The rates should be staggered in accordance with age if so many destined to live to nineties.Or is it more about the Inheritance tax on the remnant?

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clarkkent

Feb 16, 2012 at 13:45

This is all part of the engineered assault on the baby boomers who have been sensible with their investments, to make sure we are kept down with the havenots who pi55ed it all up the wall.

They will be attacking the property rental market next and even ISAs will not be safe.

Those sensible enough to take the drawdown route surely will be sensible enough to know how much can be safely drawn out without depleting their fund, or am I wearing the rose tinted specs again.

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Potty Toynbee

Feb 16, 2012 at 13:46

S-ville: To be eligible for flexible drawdown one must have secure pension income of at least £20,000 per year, in addition to your drawdown plan.

The Government must adjust the rules again to take into account these unforeseen conditions - low interest rates and high inflation especially for the elderly. A reversion to the previous GAD rate of 120% or even higher is a way to go.

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Hyman Wolanski (MD Sippchoice)

Feb 16, 2012 at 14:09

Any method of determining the maximum income payments under capped drawdown that is geared to a single indicator - the 15 year gilt yield in this case - is likely to produce unintended results at some stage. The current position can never have been intended by the policymakers.

There are now SIPPs in drawdown where the fund is earning more on its investments than the maximum amount that can be paid out under capped drawdown, which is particularly galling to members who need the income but are being constrained by a system that is just not fit for purpose. A better system for determining the maximum income under capped drawdown can, and should be, introduced.

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DirtyHarry

Feb 16, 2012 at 14:15

I was contemplating putting some extra money into the SIPP. Now it looks like it might be better to hide gold bars under the mattress!

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Mr Robert

Feb 16, 2012 at 14:34

I think we will all be hiding under the mattress before this downturn is finished!

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John Griffiths

Feb 16, 2012 at 14:36

Strongly agree with Mr Wolanski - this is an anomaly - if we Drawdowners want to release ourselves from this we have to buy an annuity at the present silly rates to get up to the £20k secured income - somewhat defeats the object.

I never thought I'd agree with Ms Toynbee, but she is right as well!

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Bill lawson

Feb 16, 2012 at 14:41

Forget pensions put your money into something you can control like antiques, property and the stock market be well and truly in debt when you retire and join the freebies club.

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DirtyHarry

Feb 16, 2012 at 15:10

The system only works for those on high pay avoiding the 40% rate presumably the rest of us in the private sector can go to hell as far as any politician is concerned!

Its time to allow bigger drawdown levels and impose a minimum fund at annuity according to age and consider more realistic annuity threshold levels otherwise as a previous contributor is stating even the tory party is waiting to pick at the bones of our retirment funds by way of inheritance tax - Where's my gun?

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James Button

Feb 16, 2012 at 15:26

So - £100K fund = £25K cash + £75K for SIPP/drawdown was about £5500 pa @ 120%.

less 30% = £4K pa, or about 5%?

So can you get 5% return on a 1 year notice savings account, if so, that's better than many annuities being offered, and at under £85K that's a Government guaranteed return of capital too!

Then you just have to wait for the base rate to rise before you can do better with a savings account than the government allowance for pension.

Logic - Nah wouldn't want to complicate things with that!

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snoekie

Feb 16, 2012 at 16:25

I must be more than a bit thick.

I didn't understand what was being said other than than I might be capped on draw down to the yield on a notional gilt, when the investments in my SIPP are in shares, some not currently paying a dividend (RBS, Lloyds, IFL, Lonr, Punch) but others paying out an average of 5%. Overall down 25% on cost. Not a great advert for my picking abilities, however other picks well up on their cost (more of those than the losers). Some I knew were punts (IFL & Lonrho), and are beginning to look good for capital rises and if they do, income will follow.

Although some of my picks are yielding a dividend, they are down on cost.

So if I were to be tied to gilts rate, I will find that my SIPP is yielding maybe 4%, but the drawdown will be held to 2.24%, meaning that the govt will be forcing the increase of the SIPP so they can then steal 56% of forced increase (equating to getting on for £2k a year). If my picks, most of them, start yielding decent returns, that £2k will rise to something $4-6k annually.

Admittedly that will increase the income of the fund, but my question is why should I not be allowed to drawdown the full income yielded by the fund, rather than a figure dreamt up by a CS scratching his or her rear end and sucking on the product?

And then there is the tax treatment. When I draw down, I am liable to tax on that, when the dividends have already been taxed at source, heads HMRC wins, tails I lose, and quite badly.

Is it not time that HMG started rewarding those that made provision for their twilight years (and were robbed by that Scottish git and his expense defrauder appendages sidekick (not forgetting his co-conspirator wife) by reducing the penal tax rates, in life and on death?

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James Button

Feb 16, 2012 at 17:15

I'm not 'authorised' to give advice, but my understanding - from wot my advisor said, and my additional reading:

Advisor - not too bady off - if they are lucky.

Investor - things that you go down in coal pits, things that you use to fix wood to wood with a hammer, or a 'driver' ahd various terms used on a farm.

Fund 'Manager' - thanks for the % fee based on the fund value

Government - Enjoyed doing all that to the investor.

I would advise anyone not paying 40% tax, or having lots put in by their employer to seriously consider alternatives to a pension fund

Reminds me of the nurses 3% pay award, when the government used all the press to announce they would help with 1% of those 3%

So Trust adds £3.00 to gross pay, less 20% tax and 12% EE NI

(err - 32% = almost £1.00, then add ER NI at another 12% = £1.35 to HMG, making a profit to them of 12% on the nurses pay award!

So I cannot see that you have got much wrong!

Unless you voted for Labour, Conservatives, or LibDem recently!

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Kenpen2

Feb 16, 2012 at 20:18

Well said Hyman Wolanski ! All those of us already in drawdown ought to be writing to our MPs TODAY to protest against this new iniquity.

And to those of you still working and saving towards a pension (as I did all my working life), my thoughts now are - don't bother. The bribe of tax relief on contributions isn't ultimately worth the clawbacks, restrictions and red tape when you try to draw an income from your savings. Better to paddle your own canoe from the outset.

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Gatser

May 14, 2012 at 13:48

Yet again this Hot Potato is thrown around.

As suggested above.... we should all be canvassing our politicians to allow SENSIBLE levels of drawdown.

Surely, higher levels of sensible withdrawal will create more spending in the economy and possibly more tax for HMRC?

If one person has a £100k SIPP and another person a £500k SIPP, I fail to understand why they both have to be limited to the same derisory % cap on drawdown.

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Bill lawson

May 14, 2012 at 15:14

Gatser, you sure are right I think our chancellor has got it very wrong, it certainly caused me problems ,I had spent the maximum which was expexted only to find it cut by about a 1/3rd why should the goverment plan my life for me without notification , my retirement is my business if I spend too much before expireing they will not pay me any more pension and they are missing out on the vat etc.

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DM

Jun 28, 2012 at 10:50

As a twentysomething just starting my career, I'm really considering not bothering with a pension. The tax break, which only amounts to 7% on anything I pay in while on basic rate income tax, would maybe make up for the pathetic rate of growth of my fund... but if I'm going to be either forced to buy an annuity or have my withdrawals capped, I'm better off putting my savings towards a mortgage deposit. I can draw that down with no restrictions when I need to, and the asset (my house) is likely to grow faster over the long term.

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Anonymous 1 needed this 'off the record'

Jun 28, 2012 at 14:16

DM, Bit of an old thread to post to -

BUT, my take on your post:

See the post from snoekie etc above.

Also consider that only a pension fund, and the home you live in are protected from being considered convertable assets should you become unemployed.

The value of a house (etc) can go down as well as up.

so- after managing to get a deposit together (and the not till you're over 35 thing isn't new, just hyped by them that want to be in the press)

You have the maintenance of the property and the interest on the loan to pay, plus insurance etc.

BUT - the value of the home is of little relevance as most property goes up, or down together, and whatever you get from a sale will be required for a purchase (not forgetting the tax, and fees.)

So - my take -

If you expect to be unemployed and want to live on benefits (up to your retirement) age - put the money in a pension, or your home

If you do not expect to need help from the government - ISA's etc and longer term investments (or savings tracker based), or short term ones - instant, or short notice so you can move them when the BOE rates go up!.

Consider the mortgage terms carefully:

offset means you need to have 'spendable' savings

but one where you can put lump sums in, and take them out as needed mean the bulk of your assets are in the home, but you can get at some if you need to fix the roof etc.

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AKW

Oct 07, 2012 at 18:25

With flexible drawdown what tax is paid at death on the remaining SIPP envelope?Is it tax free between husband and wife ? After the death of both husband and wife does the estate/ family inherit the SIPP envelope tax free ? If so do they have to meet the £20000 pension criteria to utilise the inherited SIPP envelope ?

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