Tough times for Pension Drawdown
You'll have noticed that one consequence of current market conditions is a reduction of gilt yields, and a consequence of that is lower GAD rates for pension reviews. The next GAD rate is based on 2.75% return, the lowest ever and down from 4.25% earlier this year.
This sort of reduction is equivalent to around a 10% drop in the maximum pension. Many pensions are coming up to 5 year drawdown reviews and they now have 4 factors acting against them:
- The reduction in the maximum from 120% to 100%
- The new GAD tables introduced in April
- The lower gilt rates now being used in the table
- Recent stock market falls may have reduced the fund value
Anyone who has been drawing the maximum GAD could be seeing a big reduction when the pension next gets reviewed. Estimates vary, but reports that maximum pensions could halve in some cases could turn out to be true. Our experience is that those in income drawdown generally know it's coming, but it could be worse than they expect.
If you factor in the increased tax charge on death once funds are vested, then advisers will need to proceed with extreme caution in making drawdown recommendations, particularly for younger clients. It would be a brave decision to "lock-in" the current rates on the assumption that the future trend will be downwards.
Of course, not everyone draws the maximum and, for those that do, these limits are for their protection and designed to ensure the money doesn't run out. For anyone looking to take more than the maximum GAD, flexible drawdown might help and we are getting an increasing number of enquiries for this option. It needs careful planning, but for the right person a higher level of drawdown can offer the solution to the varying stages in the retirement process. If you have a client who you are advising to go into annual flexible drawdown, we can incorporate this within our standard products without extra costs.
Some providers have been pushing Scheme Pension instead - we can do that as well, but it has its disadvantages. Flexible drawdown (as the name suggests) really is flexible, Scheme Pension is a fixed amount every year whether you want it or not, and has the potential for unauthorised payment charges if the pension has to reduce. We see Scheme Pension as having value for those who do not have the £20k minimum income requirement, also for the 10 year guarantee which can be built in, and for those in poor health.
As ever, pensions aren't simple, but with all the options of Capped Drawdown, Flexible Drawdown and Scheme Pension those in receipt of quality advice will be best placed and we can offer you the widest range of solutions for your clients.