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Holding pattern

Advisers and their clients face stark drawdown choices but the answer could be to hold back some assets until rates improve, Gregor Watt reports


Unless clients are fortunate enough to qualify for flexible drawdown, the options of capped drawdown or conventional annuities have become less attractive over the last 12 months.

In fact, conventional annuity rates have been on the slide for four consecutive years, falling by 8.4 per cent in 2011 alone, according to Moneyfacts.

Investment Life and Pensions Moneyfacts editor Richard Eagling says: “Unfortunately, by increasing the demand for fixed-income instruments such as UK government bonds, the ongoing eurozone crisis and the Bank of England’s quantitative easing programme have driven gilt and corporate bond yields down over the last 12 months, both of which under-pin annuities.”

The move to restrict the amount of income that can be taken from capped drawdown from 120 per cent to 100 per cent of the GAD rate has been compounded ’Drip-feeding a small amount on a reg-ular basis could increase a person’s chances of raising their over-all income level if stockmarkets or gilt yields improve’by a reduction in GAD rates caused in part by the same falling bond yields.

MGM Advantage pensions technical director Andrew Tully says: “The past year has seen the perfect storm of falling investment markets, improving longevity and falling gilt yields impact on the income that drawdown customers can take. Combined with the reduction in the maximum income limit, this creates a stark choice for cust-omers and their advisers.”

Walker: ’Dripfeeding a small amount on a regular basis could increase a person’s chances of raising their overall income level if stockmarkets or gilt yields improve’

However, Skandia’s pension expert Adrian Walker has suggested one simple way to offset the reduction of drawdown rates is to hold back a small amount of pension assets and wait for either equity markets to improve or gilt yields to increase before adding that amount to the drawdown fund.

Walker says an investor with a £100,000 pension fund who took full tax-free cash and moved entirely into drawdown on October 3 last year would have a maximum annual income of £3,825. However, if the same client held back just 1 per cent, £1,000, of the original pension pot, this could be increased to a maximum annual income of £4,175 if the portion held back was added to the drawdown fund at the end of October. This rises to a maximum of £4,308 a year if the £1,000 held back was added to the drawdown amount at the end of November.

Walker says the boost to income is caused by the fact that by adding the new funds to the total amount in drawdown, the entire fund can then be re-tested on the maximum income levels that apply at the point the extra funds were added. Between October 3 and November 30 last year, the FTSE 100 increased from 5,075 to 5,505 points while gilt yields increased from 2.75 per cent to 3 per cent.

Walker points out that two caveats apply to this approach, however. The first is that you need a pension scheme that offers this flexibility while the second is that if markets and gilt yields drop, the total amount of income can be reduced instead of boosted.

Walker says: “Holding a small amount back and dripfeeding it, possibly on a regular basis, into drawdown could increase a person’s chances of raising their overall income level if stockmarkets or gilt yields improve. Importantly, the entire pension can benefit from any improvement in maximum income calculations if the pension arrangement is structured in this way. This can give hope to those who cannot wait for gilt yields to improve before they start to take an income from their pension.”


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