Anyone who has done an Annuity rates comparison in recent months will confirm just how far Annuity rates have dropped, mainly due to plummeting gilt yields. But it isn’t just Annuities which have been affected, people with Income Drawdown plans are in many ways the hidden victims of falling gilt rates.
Maximum Income Drawdown income
The maximum amount which can be taken from an Income Drawdown plan is set by the Government Actuary’s Department. Known as the GAD rate it is also linked to gilt yields and has consequently fallen significantly over the past year or so.
In fact the fall in gilt yields has been so dramatic they are in danger of falling below 2%, something previously thought so unlikely maximum income figures for gilt yields of less than 2% were not actually calculated by the Government Actuary’s Department.
The amount of income available from Income Drawdown plans must be reviewed at regular intervals, for those under 75 reviews must take place every three years; if you are over 75 an annual review is required. As a result of lower gilt yields pensioners are seeing the maximum income available from their Income Drawdown plan reduced significantly, in many instances by as much as 30 – 40%.
The problem has been compounded by a change introduced by the coalition government which saw the maximum income allowable reduced from 120% of the GAD figure to 100%.
Finally, Income Drawdown investors have had to put contend with volatile stock markets, which in many cases will mean fund values have fallen, yet another factor reducing the maximum income which can be taken.
Falling gilt yields were causing concern amongst pensioners, advisers and financial experts, who have all been worried that gilt yields will drop past the 2% mark, causing further pain to Income Drawdown investors.
However HMRC have moved to ease such concerns by announcing a minimum cap of 2% for future GAD calculations. Financial experts believe that the move means even if the 15 year gilt yield used in calculating the maximum GAD figure falls below 2%, pension trustees will still be able to use the 2% figure when calculating the maximum income available.
Whilst not helping those people who have seen their maximum income plummet at their latest mandatory review, it will offer a small crumb of comfort to those people worried at just how far gilt yields and therefore the maximum allowable income could fall.
Experts point out that for those people who satisfy the Minimum Income Requirement (MIR), of £20,000 per year, Flexible Drawdown is also an option, with income payments not limited by the GAD rate. For those people who fall short of the MIR the HMRC ruling will hopefully ease some of the anxiety regarding how low their income could fall, if doing nothing to raise incomes in the short term.