Income DrawDOWN

This blog post intended for Income drawdown clients of Green Financial only
(but anyone is welcome to read)

I’m writing to you because you have a pension income drawdown plan, which is can also be referred to as an income withdrawal plan.

Please accept my apologies if there is, by necessity, jargon, acronyms and specific pension terminology in this letter. This letter is also published on my blog with helpful links and an appendix with those links is attached and a short jargon buster is also included.

I last contacted you on this matter in February 2011, in advance of the new rules, in case you wished to review your income at that point, as it was the last chance to increase or amend before the new rules were formally announced in the March 2011 Finance Act which was passed into law in July 2011 . I also provided a link to a blog post I wrote with further info. http://greenfinancial.blogspot.com/2011/02/for-green-financial-pension-drawdown.html 

Income is falling…

Due to a number of economic and legislative factors, as plans reach their review point, which is now every three years rather than every five, the maximum income available to draw is falling for many people, in some cases quite drastically. This is not the case for everyone or every plan but to be forewarned is to be forearmed in case it affects you.

The purpose of this letter is to explain why and how the changes might affect you and your plan and to prompt you to ask for assistance should you feel you need it.

 

Why Drawdown?

Many clients opted for drawdown in order to draw as much from their pension as fast as they could, especially if they had other wealth and other income elsewhere, reasoning they’d rather have the money in hand than languishing in a pension.

Other people chose drawdown as they didn’t like the idea of buying an annuity

Some people chose drawdown because they wanted to access a tax free lump sum and didn’t need to take income

And there are many other reasons too – If you need reminding of your specific reason(s) for choosing a drawdown plan they will be in the letter I wrote to you just after the plan was set up.

Why is income falling?

There are a number of reasons mostly to do with the economy and changing pension legislation.

• In recent times there has been a general consensus that the requirement to buy an annuity with a pension (until recently one had to purchase an annuity by the age of 75) was unfair or unjust. Seemingly in response to public opinion the requirement to purchase an annuity has been removed. So in simplistic terms, previously drawdown had an ‘end date’ (75) but now it can go on almost indefinitely, so the money has to last longer, so the rate at which it can be withdrawn has lowered, in order that the pot does not run out, ie there is no money to pay an income.

• The Finance Act 2011 introduced a three year periodic review rather than every five years so the revaluing of the plan happens more frequently meaning any reduction in income happens more frequently (of course of income could increase that would be more frequent too)

• The Finance Act 2011 reduced the maximum permissible income from 120% of HMRC/GAD rate to 100%. Again, to simplify this, it means that previously one could draw income at a rate faster than via annuities, but now the maximum withdrawal rate has been lowered more in line with other methods.

• Interest rates are lower now than previously

• The revised HMRC/GAD rates introduced in April 2011 are lower than previous rates

• Another big factor that could reduce income levels further will be that investment returns have been lower over recent years, particularly equities. Investment performance and review is just one of the topics I mention each year when I send your review pack. So for those relying on high equity performance to keep the remaining pension pot value up, this will be a big factor.

As a rough guide, the ‘balanced’ pension sector typical fund has moved in a band of approximately +/-25% either side of the October 2006 value and in October 2011 was +12% up. Based on that, if drawing 5% of the fund as income per annum, the fund would now be 15% down on the 2006 value on investment performance alone. Please remember this is a simplified example to illustrate how investment performance affects these products not a personalised report on your plan and content.

• Those invested in cash will also have seen the real value of the fund reduce and thus the real value of the income it can provide reduce as inflation erodes the value.

More detailed information is included in the guide I have enclosed.

If you’d like to speak about your own plan, please do contact me.

Yours sincerely,





Ian Green

 

Appendix

Please note:

Any links to websites, other than those written by Green Financial are provided for general information purposes only. We accept no responsibility for the content of these websites, nor do we guarantee their availability.

Any reference to legislation and tax is based on our understanding of United Kingdom law and HM Revenue & Customs practice at the date of production. These may be subject to change in the future. Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circumstances. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments.

This letter and attachments are also stored on your secure personal client website. Let me know if you need help accessing this

Links

Green Financial Blog Post from Feb 2011 with action point reminder and jargon buster

http://greenfinancial.blogspot.com/2011/02/for-green-financial-pension-drawdown.html

Finance Act 2011

http://services.parliament.uk/bills/2010-11/financeno3.html

HMRC Pension Website

www.hmrc.gov.uk/pensionschemes

GAD tables

www.hmrc.gov.uk/pensionschemes/gad-tables

Money Advice Service Income Withdrawal Guide

http://www.moneyadviceservice.org.uk/_assets/downloads/pdfs/your_money/a5_guides/income_withdrawal.pdf

Green Financial guide to Retirement

Information on drawdown on page 18 and A-Z jargon buster at the end

http://www.iangreen.com/downloads/Retirement.pdf