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It's a GAD world

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I am 65 years old and have a pension from which I have been taking income through drawdown for nearly five years. The review documents show a big reduction in my maximum annual income. Do I have any options that would increase my income?

Unfortunately, a few factors have worked against you since you started drawdown. The maximum amount of income you can take through drawdown has always been determined by GAD rates (set by the Government Actuary’s Department) and this is still the case. However, the maximum level has recently reduced from 120 per cent of the GAD rate to 100 per cent of the GAD rate (that is, a reduction of over 16 per cent).

In addition, GAD rates themselves have reduced and are continuing to reduce on an almost monthly basis at present.

As GAD rates change in line with other factors (specifically gilt yields), it could be that they will increase again in the future. If your drawdown policy is one that allows member-nominated reviews, it might be possible for you to request another review as/when the rates improve, which would increase your maximum income although probably not to the levels you have enjoyed previously.

Another option would be to take your remaining pension fund and buy an annuity. This would provide you with a guaranteed income for the rest of your life.

However, annuity rates are also very low at present and the reasons you chose the drawdown route over annuity purchase previously may still stand. Therefore, this is unlikely to be a palatable alternative for you.

A third option would be to see if you could qualify for flexible drawdown. This is a new alternative to capped drawdown (the type of draw-down you have been used to over the past five years).

The big difference with flexible drawdown is that the maximum income limit set by reference to GAD rates does not apply. You are free to take as much income from your fund as you like, whenever you like.

Of course, it is never quite that simple as there are certain conditions that must be met in order to take advantage of flexible drawdown - the main one being that you must have a guaranteed income from other sources of at least £20,000 a year and there are only certain types of income that can be counted.

For clarity, this income must be in payment at that level during the tax year in which you wish to use flexible drawdown, not simply due to be paid in the future.

State pensions in payment can be included - being 65 you should be in receipt of a state pension. Pensions in payment from registered pension schemes can be included - do you have any such pensions?

Lifetime annuities from registered pension schemes in payment can also be included.

If you have added up all your appropriate income and are not quite there, you could consider using part of your drawdown fund to purchase an annuity to make up the difference.

So, if this is not your only pension, there may be options to help you increase your annual income. However, please note that any income you take from your pension fund will be subject to income tax and the more income you take from your pension fund, the more likely your fund is to run out in the future.

Emma Duncan is a director of Thameside Wealth Management

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Readers' comments (3)

  • Those cursed GAD Rates again, a shackle that's well overdue for removal. But the government refuses to listen, preferring instead to railroad everybody into NEST.

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  • Why wasn't Scheme Pension viewed as, at the very least, an option here? Free from the shackles of GAD and ill health can be factored in.

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  • I'm surprised capacity for loss and fund depreciation hasn't been mentioned. It's no good trying to get more and more from the fund if it isn't sustainable long term and if this is the only form of income. If a drop in income will cause financial hardship then perhaps a drawdown is not the right place to be?

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