The government has indicated it will make no changes to help Income Drawdown investors faced with cuts to their annual incomes.
Income Drawdown, or Capped Drawdown as it is now more properly known, allows retirees to draw directly from their fund albeit with a cap on the annual income which can be taken. The maximum allowable income is set by the Government Actuary Department and as is often known as the GAD rate.
GAD rates for Income Drawdown investors
The GAD rate is linked to your gender and the 15 year gilt rate, which over recent months has fallen significantly, resulting in a reduction in the maximum level of income available to Income Drawdown investors. The GAD rate fell as low as 2.25% but has since risen slightly over the past couple of months to 2.75%, you can read more about this here.
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Despite the recent small rise, the low GAD rate is affecting existing Income Drawdown investors who will often see the maximum income they can take cut at their mandatory reviews. These reviews must now take place every three years for people below the age of 75 and yearly over that age.
Would be retirees may well also affected as they will now be able to take less income that they planned for.
Cut in the maximum income
The problem of falling incomes from Capped Drawdown was made worse by a government decision to further reduce the maximum income which could be taken. It was previously the case that the maximum allowable income was 120% of the GAD rate, however the government reduced this to 100% from April last year.
This change, added to falling gilt yields has caused real hardship for Income Drawdown investors, many of whom have seen their incomes fall by as much as 40%.
Many industry experts, as well as investors, have called on the government to take action to help alleviate the problem; this now looks unlikely following a letter from Treasury Financial Secretary, Mark Hoban.
Responding to a letter from a Conservative MP who had been contacted by one of his constituents Mr Hoban said: “Whilst the Government reforms to extend and improve Capped Drawdown gives greater freedom, they do interact with the effectiveness of a fund manager’s strategy and gilt rates to determine the maximum drawdown.”
He continued: “The Government appreciates that in the short term, some of the other factors affecting drawdown rates may be combining with the change in the annual withdrawal limit to reduce individuals’ total drawdown income.
“However, the Government’s reforms are based on longer term considerations; we are confident that the reforms will improve flexibility and income sustainability for savers for the future.”
Some experts have reacted angrily to the government’s unwillingness to listen to the concerns of investors, arguing that when the reduction from 120% to 100% was made, the fall in gilt rates have not been foreseen. These factors have combined to significantly reduce the maximum income available, which many people see as unfair.
Flexible Drawdown
At the same time as the GAD rate changes the government also introduced Flexible Drawdown, which allows retirees to take more than the maximum income available under Capped Drawdown, providing that the Minimum Income Requirement (MIR) was met.
The MIR is currently set at £20,000 gross and must be made up of State Pension, Annuity income, or income from a Final Salary or Defined Benefit scheme.
For those people who qualify Flexible Drawdown can be an effective way of overcoming the constraints of Capped Drawdown.
Our team of Independent Financial Advisers in Nottingham are experienced in developing retirement income strategies for clients the length and breadth of the UK. If you are approaching retirement and would like advice on your options call one of our IFAs today on 0115 933 8433, alternatively enquire online or email info@investmentsense.co.uk
