A better deal on income drawdown

Clients who took income drawdown as the markets crashed are not necessarily locked in to the reduced income for five years, writes Mike Morrison of AXA Wealth, illustrating his point with a fictional case study.

Financial adviser David is visiting his father Victor to discuss retirement planning, in particular income drawdown – otherwise known as unsecured pensions (USPs).

Victor is in his early 60s and was made redundant nearly a year ago. He has two pensions: a money purchase scheme that he transferred into a personal pension some years ago, and a defined benefit (DB) scheme that is due to start paying out when he reaches 65.

Unfortunately, Victor and his wife have few other liquid assets and there is little chance of him getting a new job.

The drawdown route

David had advised his father to use his personal pension scheme to provide an income using income drawdown until at least age 65 when his DB scheme would start payment.

But circumstances conspired against Victor and by the time he completed all the necessary paperwork, his USP income was calculated just as the stock market hit a low for the year and when Government Actuary Department (GAD) rates were also low. So the income he could draw was severely restricted.

Although he has adjusted his spending, Victor feels constrained in his social life and is keen to increase his income even by a few pounds a week.

Bad timing

After a fish and chip lunch with his parents, David is sitting in the front room with the papers for his father’s pension. ‘We’ve been on a roller coaster ride in the last year or so, dad,’ he starts. ‘And I think we hit the worst point for a drawdown contract.

‘Markets were down, so the fund value for calculation was depressed. At the same time, gilts were low, which was reflected in GAD rates being low. This meant the amount of income you could draw each year was also depressed.

'To put it in context, the FTSE index hit a six-year low and the gilt rates for GAD dropped to their lowest since drawdown began in 1995.’