If you are considering income drawdown instead of buying an annuity you might wish to delay doing so until May. Many advisers are urging retirees on the verge of taking income drawdown to wait until May or they will lock themselves into a record low level of income.
There have been many reports that the Bank of England’s quantitative easing programme and bank interest rate at an all-time low of 0.5% had pushed down gilt yields, causing a negative impact on those people taking income drawdown, and this is because the Government Actuary’s Department (GAD) rate for drawdown is calculated each month using what is known as gross redemption yields on UK gilts as a basis and this income has to be locked in for five years.
The rate for March was 4%, which equates to a maximum income of £7,200 a year for a man of 60 with a pension fund of £100,000, but April’s yield dropped to 3.25%, the lowest since income drawdown was introduced in 1995. This GAD rate only allows a maximum annual income of £6,600 on the same basis of a 60-year-old man with a £100,000 fund. However, the figures for May, are more promising, increasing the GAD rate to 3.75% which allows a maximum annual income of £7,080. It all makes income drawdown quite a complex retirement option.
This whole episode illustrates just how unfair the calculation for drawdown is. Anybody considering taking the maximum annual income from drawdown now will be greatly disadvantaged compared with someone starting their drawdown arrangement in March and someone who will start theirs in May.
GAD rates are very important because they set the maximum income limit for the next five years. The conclusion is that retirees should pay extremely close attention to the timing for the start of their income drawdown plan. Indeed, if retirees can wait for another month to lock in their income, then they definitely should do so, but taking maximum income is rarely a good idea, particularly in volatile markets, as it can eat away at the overall pension fund. too rapidly. Don’t forget, gilt yields and bank rates also have an effect on annuity rates.
