A 60-year-old male went into drawdown on 1 December 2006, with a fund of £300,000 and a maximum income of £22,320 per annum.
If, at his pension review on 1 December 2011, the only factor in the calculation to have changed had been his age, our client might reasonably have expected his maximum income to have increased to £25,200. In reality, several factors combined in such a way that it had actually fallen to just £15,432 per annum.
In order of impact, the drop in income was caused by the following factors:
1.
A fall in gilt yields
38.24%
2.
Government’s decision to scrap the 20% uplift
37.19%
3.
A fall in investment markets
18.18%
4.
Government’s decision to update GAD tables
6.38%
Anyone investing in an income drawdown plan accepts a range of fundamental risks. They must be prepared for the possibility that high income withdrawals may not be sustainable, and may erode the capital value of the fund.
There has been speculation about difficult market conditions increasing the likelihood of these risks becoming reality for many investors. It has even been suggested that there is a significant risk of depleting the entire fund. With all of this in mind we recently carried out some modelling to see if there is any truth in the speculation.
The model looks at a 65-year-old client investing £300,000 in income drawdown, and drawing the maximum available pension every year up to age 90. The table below shows the remaining fund value at various points in time, assuming that 5% and 7% p.a. growth is achieved.
Age
Fund value at 5% p.a. growth
Fund value at 7% p.a. growth
65
£300,000
£300,000
70
£287,040
£317,723
75
£260,359
£319,834
80
£212,948
£288,696
85
£148,320
£222,275
90
£90,278
£149,762
Assumptions: male investor, GAD rate of 2.25% until age 90.
So, even in the unlikely scenario that maximum pension is drawn every year, the risk of fund depletion is not as significant as some would suggest. Crucially, the need for frequent income reviews offers protection.
With this in mind, I remain firmly of the view that the current rules are overly harsh, and that there is a compelling case for the Government to immediately:
Billy Mackay
Marketing Director
AJ Bell