SIPP - Why not go into draw down?

jamesd

As atush explained, the GAD limit regulates how much money you can take out of a pension pot using income drawdown each year. I've posted a table showing how the rates vary in this post. The 2.5% gilt yield row is the one to use at the moment.

At the 2.5% for a man in their sixties the permitted drawdown rate varies between 4.9% and 6.6% of the capital value. The lower values in that range are below the normal returns of investments used to produce income and even 6.6% isn't clearly above investment returns. The result is that you can get an artificial cap on how much you can take out, even though what you'd like to take wouldn't cause the capital value to drop.

This effect is worse at younger ages. It's worse still for early retirement at younger ages where you would naturally want to draw at an unsustainably fast rate for a few years until your state pensions and possibly work pension start, then fall back to a lower rate.

The effect is to make it harder for those who are doing good and careful financial planning to use pensions for their early years of retirement income planning, because they can need to use something else to get the required income levels for various periods.

Most of this is moot for the case you have in mind but it's good to be aware of the cap in case it's a factor.