Understanding private pension rules

zaksmum

Just read a letter in a newspaper from a man who had been receiving a private pension of £380 a month. Due to government changes in the "GAD" amounts, the maximum amount he can now have is £180 a month, a loss to him of £200 a month.

O/H gets a private pension which is more than £180 a month. We've never heard of this "GAD" before and are a bit worried.

Does it apply to ALL private pensions?

Can anyone enlighten me, please?

jem16

zaksmum wrote: »

O/H gets a private pension which is more than £180 a month. We've never heard of this "GAD" before and are a bit worried.

Does it apply to ALL private pensions?

Can anyone enlighten me, please?

No it applies only to pensions using the Income Drawdown method where the pension pot remains invested. It is also known as an Unsecured Pension.

Most private pensions buy an annuity which provides a monthly income for life. This is more likely to be the type of pension income you are receiving.

dunstonh

Just read a letter in a newspaper from a man who had been receiving a private pension of £380 a month. Due to government changes in the "GAD" amounts, the maximum amount he can now have is £180 a month, a loss to him of £200 a month.

A drop of that size indicates he was almost certainly taking the maximum amount previously. This was generally regarded as a bad idea for most people and the Govt lowered it. Then the gilt yields dropped as well which didnt help. Had he been taking a more suitable amount, then the drop would have been lower or none at all.

Effectively, he took an income that has to be reviewed every 3 years and is variable on each review. it will go down as well as up. It is not an annuity.

givememoney

Yes I read the same letter and was concerned.

I am sorry but I still do not really understand. I am retiring at the end of the month and I have taken the biggest lump sum available to me and will be left with about £200 per month pension on top of my state pension which I already take and have been taken since reaching 60 four years ago.

Does this apply to me or not?

jem16

givememoney wrote: »

Does this apply to me or not?

More than likely no it does not apply to you.

To be sure how did you arrange your pension?

dunstonh

Does this apply to me or not?

Do you intend to buy an income option that is subject to investment returns and take more than is recommended (known as the unsecure income option) or a secure income for life (known as the secure income option)? If the latter, it does not matter what this person did. They took risks (above the norm) and they are now paying for it.

gadgetmind

dunstonh wrote: »

A drop of that size indicates he was almost certainly taking the maximum amount previously.

Other than to avoid HR tax, there is little reason to take any less as you can invest any excess in ISAs.

This was generally regarded as a bad idea for most people and the Govt lowered it.

Regarded as a bad idea by who?

Then the gilt yields dropped as well which didnt help.

If someone using drawdown had a sensible portfolio, the gilt yield dropping would have benefited said portfolio, and the only reason they suffered is because of HMG's current obsession with linking drawdown to 15-year gilt yields.

Had he been taking a more suitable amount, then the drop would have been lower or none at all.

Perhaps said person in drawdown wanted a higher income to bridge them to state pension age? I'd love to take 5.5% at age 55 and then drop this to 3.5% at age 67, which firecalc reckons has a zero percent chance of failing over a 30 year period (based on all historical 30 year periods.)

Why shouldn't I be allowed to use a back-tested and mathematically sound approach?

It is not an annuity.

No, it isn't, so why force the same shackles onto its legs?

Those using drawdown are typically a bit brighter than the average bear and are quite capable of arriving at a sustainable approach customised to their own needs.

jamesd

givememoney wrote: »

I am retiring at the end of the month and I have taken the biggest lump sum available to me and will be left with about £200 per month pension ... Does this apply to me or not?

We can't say based on the information you've provided. It does not apply if:

1. It's a work final salary or similar pension.
2. You are going to buy an annuity.

It does apply if:

3. You are going to leave your pension pot invested and take an income from investments.

It might apply if:

4. You have been able to pick your own investments and choose not to buy an annuity (case 2) but instead to use income drawdown (case 3).

We don't know enough about your type of pension to know which of those cases applies to you. If you can tell us more we could probably give you a more specific answer.

jamesd

zaksmum wrote: »

Just read a letter in a newspaper from a man who had been receiving a private pension of £380 a month. Due to government changes in the "GAD" amounts, the maximum amount he can now have is £180 a month, a loss to him of £200 a month.

This means that he chose to take his income using income drawdown. He's not actually losing the £200 a month because it'll stay in his pension pot. It's just not available to take as income for a while, until the limit goes back up again in a few years. Because this is income from investments, prudent people using this approach will have arranged to have at least a few years worth of income in savings accounts to smooth out income levels. For such people this means a few years when the balances in the savings accounts will drop instead of staying the same or increasing. If he's over 75 the limit is calculated every year.

The limit is lower now because of two main factors:

1. This government changed the calculation of income from 1.2 times to 1 times part of the calculation. That reduced the maximum income by 18% at the stroke of a pen.
2. The GAD limit is related to the interest paid on 15 year term government bonds called gilts. The fiscal easing has greatly reduced these yields (interest rates) and that in turn has greatly reduced the income that can be taken out of people using this method for their pension income.

It's also possible that the person concerned had the calculation done at a time when their investments had reduced in value.

While this is the approach that I expect to take, most people will either have a work finals salary pension type or will choose to buy an annuity. That makes the GAD calculation irrelevant, though the low gilt yields have also caused annuity rates to drop, for life if purchased now, not just for a few years.

jamesd

dunstonh wrote: »

A drop of that size indicates he was almost certainly taking the maximum amount previously. This was generally regarded as a bad idea for most people

So they should. It's likely to be the best idea for most people, who can simply move the money into a S&S ISA, leave it invested and gain protection from some of the legislative risk that has contributed to the current problem.

Taking the maximum and spending it would be a different thing, though that would still be optimal if it avoided drawing on other investments.

The pension money comes with sufficient restrictions that it's best to drain it as rapidly as permitted to preserve or increase money outside the pension. Unless it's being used as an inheritance tax dodge or for some other niche reason.

Personally I'll be starting on this reduction of legislative and other risks risk the moment I hit 55. Though maybe making additional pension contributions as well after that date.

gadgetmind

jamesd wrote: »

Because this is income from investments, prudent people using this approach will have arranged to have at least a few years worth of income in savings accounts to smooth out income levels.

I'm using a multi-layered approach based on cash, NS&I index linkers, S&S ISA and possibly (once yields go back up!) an IL gilt ladder.

However, I'd still *much* rather keep drawing down hard on my pension to feed into these other instruments.

Flexible drawdown is an option, but the rules here also work against people. The £20k MIR has to be actually coming in, which limits the pension you can access without hitting HR tax. Once state pension hits, it's even worse. I'd be happy to put the money in cover what's needed to cover £20k-SP, but I'd then prefer to keep this in abeyance and draw maximum pension at BR tax rates.

With a minimum income once SP hits of £20k, I'll never be a burden on the state, so why limit my options pre-SP?