The Autumn Statement increase in drawdown limits is not the panacea some press comment has suggested.
Last year the personal finance pages of the national press regularly carried stories about how income drawdown reviews had left investors facing large cuts in their future income. The drops – some by as much as 50% – were the result of five factors.
- The April 2011 reduction in the limit from 120% to 100% of the notional annuity used to set the ceiling.
- A change in the mortality assumptions for the notional annuity, reflecting improved longevity.
- The decline in long term gilt yields, which are a key part of the annuity basis.
- Disappointing investment performance over the five years since the ceiling was last set.
- Too high a level of withdrawals – choosing the maximum was (and always will be) the highest risk option.
The Autumn Statement addressed only the first of these by announcing a reversion to the 120% ceiling.
The Government has published draft legislation which confirms this reversion to the higher level will apply to all drawdown pension years starting on or after 26 March 2013. The change does not require a GAD review.
The increase in maximum income is still reliant on a change to primary legislation, yet the draft Finance Bill will not receive Royal assent until the summer. However, the Government is likely to issue a resolution on 25 March 2013 which should provide the industry with comfort that they can apply the changes before the Bill receives Royal Assent.
Although welcome, the reversion to the 120% maximum level is no complete cure, as the example shows.
A cut, nonetheless
Jim started his income drawdown with a fund of £200,000 in January 2008 at the age of 60. The maximum drawdown rate for him then was 7.8%, based on an underlying gilt yield of 4.75%. Five years later, at his first review, the gilt yield had fallen to 2.25% and, despite being five years older, his maximum drawdown rate had fallen to 5.5%. Even if the Autumn Statement reversal had taken effect, Jim would still have a maximum rate of 6.6%.
If Jim had been taking withdrawals at say, £1,200 a month (7.2% of his initial £200,000), then to maintain his income now his fund would need to have grown – after £60,000 of withdrawals – to about £262,000. The Autumn Statement change would still require a fund of just over £218,000 – a tall order given the performance of most investment markets since 2008.
4th January 2013