Flexible annuities can keep the higher GAD rate of 120%. The lowering of the maximum income drawdown limit set last year will not be extended to effect flexible annuities, the government has recently confirmed. The government decision means that people with flexible annuities will be able to continue taking up to 120% of the Government Actuarial Department (GAD) rate, rather than the lower rate of 100% for those in capped drawdown arrangements. This is because, unlike traditional income drawdown, a person with a flexible annuity cannot run out of money – the fund can’t run dry – as there is a minimum income guarantee in the annuity equivalent to 50% of the benchmark annuity income available from outset.
Andrew Tully, of MGM Advantage, stated that the past twelve months has seen what might be called the perfect storm of falling investment markets, improving life expectancy and falling gilt yields effect the income that income drawdown customers can have. This, combined with the lowering of the maximum income limit creates a difficult choice for customers and their financial advisers at income review time, he added. He then went on to suggest that people who might benefit most from flexible annuities are those with income drawdown plans who are nearing their review and are seeing substantial falls in the maximum income they can take, suggesting that these individuals may want to use flexible annuities when their income falls may not be quite as drastic. While individuals might not want to constantly strip out the maximum income from their plan, flexible annuities give individuals the flexibility to take higher amounts of income when they might need to.
Flexible annuities allow individuals to take an income somewhere between 50% and 120% of the income they could receive from a standard conventional annuity. This income can be changed, and moved up and down within this percentage range at any time. Flexible annuities also allow individuals to benefit from what is called mortality cross-subsidy. This means that on the death of the annuitant, any remaining pension fund is utilised for the benefit of other annuitants. This permits a higher income to be taken without increasing the risk of depleting the pension fund.
