In a previous blog we pointed ways around the curbs on income payments from those in a “Capped Drawdown” pension arrangement. If you have chosen not to take an annuity then your pension arrangements will normally come under Capped Drawdown – the problem with these arrangements is that you are limited in the amount you can withdraw by a formulae based on the GAD rate. The Government Actuary’s Dept (GAD) rate is linked to the yield on 15 year gilts (this is now at an all time low of 2.65%).
This is not the only restriction on pension income via “capped drawdown” as the government has reduced the amount of income that can be taken from 120% of the GAD formulae to 100%.
So many pensioners are now faced with a minimum 20% reduction in their pension income.
However the reductions in pension income may be far worse as capital fluctuations with stock market investments may mean that the total capital value that the formulae is applied to, has also reduced.
Clearly the reason the GAD rules were established was to ensure that pensioners did no not exhaust their pension funds entirely and then have to rely upon the state for support.
However any formula that is based upon the derisory yields from gilt returns is bound to be flawed. Particularly as Government financial policy is ensuring that gilt yields are likely to remain low.
Is it appropriate for your pension income to be limited by gilt yields (if held as investments) they are likely to form a small proportion of any pension investment portfolio?
Surely it is time to reform pensions and do away with present limitations on pension income?
Do you have a question on any aspect of retirement planning or financial planning? Contact one of our Financial Planning Consultants, at Pareto Lawrence we offer both Financial and tax planning advice to corporate and private clients.