Income Drawdowners - rejoice.

SallyG

http://www.ftadviser.com/2012/01/16/pensions/group-pensions/gov-t-introduces-minimum-gad-rate-cap-for-drawdown-AtXZsxkF3ChTyq8OUt6GbI/article.html

"In November 2011, Hornbuckle highlighted the pressure on capped drawdown investors, who are able to take an income of 100 per cent of the GAD rate, down from 120 per cent under the previous unsecured pension regime, as a result of a drop in the rate to a new low of 2.5 per cent following a further slide in gilts.

Stewart !!!!!!, head of sales for Hornbuckle Mitchell, said: “The two per cent minimum level offers some reassurance to worried drawdown clients who might be wondering how low it can go."

fairleads

SallyG wrote: »

http://www.ftadviser.com/2012/01/16/pensions/group-pensions/gov-t-introduces-minimum-gad-rate-cap-for-drawdown-AtXZsxkF3ChTyq8OUt6GbI/article.html

"In November 2011, Hornbuckle highlighted the pressure on capped drawdown investors, who are able to take an income of 100 per cent of the GAD rate, down from 120 per cent under the previous unsecured pension regime, as a result of a drop in the rate to a new low of 2.5 per cent following a further slide in gilts.

Stewart !!!!!!, head of sales for Hornbuckle Mitchell, said: “The two per cent minimum level offers some reassurance to worried drawdown clients who might be wondering how low it can go."

The flexibility to cap at 2% is very re-assuring i'm sure. What price isa cash income at 3.2% or even more for fixed term investors. Let alone divi inc at 5% plus tax free.

SippTechie

It is quite funny, though not for drawdown investors, that anyone is suggesting this announcement had anything to do with re-assurance.

HMRC only amended the GAD tables in April and the lowest gilt rate on the tables is 2%.

They'd need to go back and ask the Government Actuary's Department to do the tables again if the rate fell below 2% and they don't want to do it because going back so soon would make them look a bit daft.

ffacoffipawb

fairleads wrote: »

The flexibility to cap at 2% is very re-assuring i'm sure. What price isa cash income at 3.2% or even more for fixed term investors. Let alone divi inc at 5% plus tax free.

Being Mr Pedantic, it's a floor not a cap.

fairleads

ffacoffipawb wrote: »

Being Mr Pedantic, it's a floor not a cap.

Its a funny old world we live in and may you never have to eat your words.

ffacoffipawb

fairleads wrote: »

Its a funny old world we live in and may you never have to eat your words.

Eh? Don't understand.

fairleads

ffacoffipawb wrote: »

Eh? Don't understand.

We live in interesting times and today's floor might be next years cap.
Incidently, my outlook is the exact opposite to that of a pedant. The true pedants here are the multi thousand bloggers who believe amongst other things that;- one must pay off all debt before saving. Must always contribute to a formal retirement fund, a pension. Must always pay off a mortgage asap. Taxrelief and employee contributions are the free money which is the panacea of investing for retirement. And last but not least - those who lace their comments with jibes - stupid, twaddle and crap being quite common. But it takes all sorts, after all we can't put old heads on young shoulders.

jamesd

This is hardly something to rejoice much about since at age 55 a 2% gilt yield produces an income cap of just 4.1% of capital for a male, forcing most to accumulate more money when they are trying to draw down the capital at some rate. It's not until age 70 that the income level rises even to 6% and produces some hope that the capital value might finally start to decline.

SippTechie wrote: »

They'd need to go back and ask the Government Actuary's Department to do the tables again if the rate fell below 2% and they don't want to do it because going back so soon would make them look a bit daft.

They already look very daft with such crazy low limits. Need to do something about that if they want to stop looking out of touch with what drawdown is and means about how income is generated.

fairleads wrote: »

The flexibility to cap at 2% is very re-assuring i'm sure. What price isa cash income at 3.2% or even more for fixed term investors. Let alone divi inc at 5% plus tax free.

The 2% figure is not the income cap, it's the gilt yield used in the calculation to work out the cap. The actual cap at age 55 for a male is 4.1% with a 2% gilt yield.

That's still a lot lower than is sensible for people trying to draw on capital, particularly at the younger end of the age range when state pensions haven't started yet and there's the need to draw at a higher than long term sustainable rate to cover the time gap.

The workarounds include:

1. Starting capped drawdown as soon as you reach age 55 and investing the money outside the pension. This has the advantage of reducing the percentage of the lifetime allowance used as well, but the disadvantage of reducing inheritance benefits for someone who is not a spouse or dependent. It's also potentially useful for recycling income into a pension to get another chunk of tax relief.
2. For those with less than normal life expectancy, use of a scheme pension to avoid use of the GAD assumptions about life expectancy.

Neither is adequate; it's daft to force people to take money out of a pension as soon as possible just to avoid a too low income cap. These are the people who've chosen and were trusted to accumulate the funds in the first place and a little more trust on the drawing down side would also be nice.