A recent article in Financial Adviser magazine (a trade magazine for the financial services industry) advocated removing the link between income drawdown maximum limits to the Government Actuary’s Departments rates (GAD rates).
At the moment, the maximum income that can be taken by an individual from their income drawdown contract is limited by the GAD rate. At a time when the annuity market has been described as “troubled”, many are calling for income drawdown to be seen as a real alternative. However by linking the fixed income limits to GAD rates, which are affected by external influences such as falling gilt yields, can have a significant detrimental effect. Instead, calls are being made within the financial services industry for income drawdown rates to be based on the ability of the fund to provide an income in retirement over the long term.
In 2006, the A-day rules meant that the maximum income which could be taken from an income drawdown contract was capped at 120% of GAD rates. Then in April 2011, this was controversially reduced to 100% of GAD, at the same time as the maximum age limit for income drawdown was abolished. The reduction in maximum income was aimed at discouraging people from using up too much of their pension fund too quickly. However this limit has now been restored to 120% of GAD rates from the start of the client’s next income drawdown year. GAD rates are also going to be reviewed to ensure they mirror the annuity market, and changes could mean that they are based on a mix of gilts and investment grade corporate bonds. Currently GAD rates are calculated using 15 year gilt yields.
Income drawdown is a real alternative to an annuity for some customers because it provides a similar level of income but with much more flexibility for the customer. Best Pension Annuity are able to provide impartial information on all aspects of income drawdown, and explain the benefits and risks of income drawdown as opposed to an annuity. Our aim is to give you all the information you need so that you can decide, depending on your individual circumstances, if income drawdown is a better option than an annuity.