17th September 2013
Income drawdown investors who are due for a review this month have received a welcome boost this month with news that they can use a 3.5% yield boosting the income they can take by around 17% compared with a year ago. This is the fourth such monthly rise in a row at least partly due to increasing yields in the gilt market because this is the basis of the calculations used to decide how much can be withdrawn from the plans.
Pension firm Standard Life calculates that a 60 year old customer moving into drawdown next month could have a maximum income over 17% higher than if they had started less than a year ago, when the yield was 2.00%. This figure does not take into account the impact of the 20% rise to maximum Gad announced in the last Budget.
Standard says: “Many retirees simply want a relatively modest, sustainable income – but with flexibility to turn it up if circumstances change. Providing a flexible, but sustainable, income source is now an option many people want. Income drawdown is well suited to meet all these diverse needs and aims. Being able to trigger a review at any time is vital to this as that means people will have the ability to benefit from positive market changes right away.”
“Standard Life recently launched a new drawdown transfer option, giving most drawdown users who transfer their pot to Standard Life the flexibility to trigger an immediate review of the amount of income they can access. “
But Standard is campaigning for more changes.
“There’s still room for improvement. The yields GAD use are out of touch with reality. The rounding system, which rounds down rather than up, has meant that despite the previous month’s gilt yield finishing at 3.24% it took another month before investors could benefit from the higher 3.25% rate. If the people were given the benefit of rounding up, rather than down, they would typically benefit from another 3% or 4% of income each time, which would have a positive impact on their retirement income needs.”
The firm has listed five proposals for improving drawdown:
1. Base pension drawdown limits on a combination of gilt & corporate bond investments.
This could give a 60 year old 15% to 20% more income. Our table below* shows the real difference moving to a 50/50 or 25/75 mix of gilts and corporate bonds could make to income limits.
2. Round up, not down.
A simple move giving consumers the benefit of rounding would typically add another 3% or 4% income. Just round the yields used to calculate pension drawdown rates up to the next 0.25%, not down.
3. Introduce a 3% floor on the yield used to calculate drawdown limits.
This safety net wouldn’t have kicked-in until this year. But it would have helped drawdown users throughout 2012, reducing volatility and protecting consumers against market extremes.
4. Average yields over six months.
Rather than basing pension drawdown rates on security yields on a single day each month, they could use average yields over six months. This would reduce volatility and make planning easier. Instead of the 23 rate changes we’ve seen in the last 36 months, there would only have been 15 (or 11, if combined with a new 3% yield floor).
5. Introduce enhanced drawdown rates for impaired lives.
Introducing special drawdown rates for customers with reduced life expectancy puts annuities and drawdown options on a level playing field – helping to create fairer choice for consumers. Those affected would receive a higher retirement income, reflecting their circumstances and needs.
The value of an investment can fall as rise, and may be worth less than invested. Laws and tax rules may change in the future and the information is based on our understanding in August 2013. Personal circumstances also have an impact on tax treatment.
If a drawdown user is considering taking a higher income they need to factor in the impact this would have on their overall pension fund. Users should be closely monitoring their fund and the future sustainability of their income.