Capped drawdown investors could see a fall in their income from July 2017 when new GAD rate tables will take effect.
Capped drawdown is an income drawdown product that was available before 6 April 2015 where the amount that can be taken as income is capped at 150 per cent of the income a healthy person of the same age could get from a lifetime annuity.
The gilt yield on which this is based for 15 June 2017 is confirmed as 1.56 per cent and from the 1 July income limit reviews will be completed using lower rates.
Currently the lowest gilt yield on the tables is 2 per cent however recent changes mean they will now go down to 0 per cent. The 1.56 per cent gilt yield for July will be rounded down, meaning a 1.5 per cent rate from the table will be used.
The maximum income that can be taken is worked out using GAD (Government Actuary Department) rates.
Suffolk Life’s pension technical manager Jessica List said: “GAD rate tables use an investor’s age and the yield on 15-year Government gilts from the 15th day of the previous month to give a ‘GAD rate’: the amount per £1,000 which is then used to calculate the income limit.
“For most investors the gilt yield for July will mean a £3 or £4 drop in the rate per £1,000 which will be used to set their income limit. This doesn’t sound like much, but it can soon add up. For example, a 60-year-old investor with a £200,000 pension will have a new income limit of £12,900 - a £900 drop from the £13,800 limit which would have applied if the 2% minimum rate was used.”
Investors who need to make up a shortfall in their income have two options. They can switch to flexi-access drawdown or take an uncrystallised funds pension lump sum (UFPLS), remembering that they will trigger the money purchase annual allowance (MPAA). With the MPAA still expected to drop to just £4,000, such a move would severely limit those investors who want the flexibility for future pension saving.
For investors with uncrystallised funds, designate further funds to capped drawdown, allowing them to take further income without triggering the MPAA. But this depends on how the pension arrangement has been set up.
Jessica List added: “Investors value flexibility and, taking in to consideration the proposed MPAA reduction, the option of moving to flexi-access drawdown or taking a UFPLS would severely limit investors’ ability to rebuild their pension if they wanted or needed to in the future.”
Commenting on the rate changes and their implications, Alan Lakey, director of Highclere Financial Services in Hemel Hempstead, said: "If ever we needed proof that pensions simplification was a sad joke, this is it.
"Most consumers do not understand and do not want to understand the intricacies of pension rules and it makes a definite argument for using a skilled financial adviser."
Chris Daems, director of Essex-based Cervello, said: "This will further highlight the benefits of flexible access drawdown and clearly quicken the speed of decline in capped drawdown arrangements."
stephanie.hawthorne@ft.com
