Investors are facing significant cuts to their income. A significant contributor to that has been Government policy. To give you a real life example of how clients are being affected, a 60-year-old male who went into drawdown in December 2006, with a fund of £300,000 was given a maximum income limit of £22,320 per annum.
If, at his pension review in 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 actually increased to £25,200.
However, in reality, several factors combined in such a way that resulted in his income actually falling by a third to just £15,432 per annum.
Many factors have influenced this income cut, predominantly a fall in gilt yields, used to set income limits, but also the decision to scrap the 20 per cent uplift. A fall in investment markets has also come into play.
Anyone investing in an income drawdown plan accepts 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.
But analysis we have done challenges the Treasury’s assertion that taking maximum cash risks funds running out. Our modelling, based on maximum withdrawals has showed that, 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 basing maximum drawdown on gilt yields is no longer appropriate. There is a compelling case for the Government to immediately introduce a short-term solution of reinstating the 20 per cent uplift on drawdown income, which was removed from 6 April 2011, and also to review the basis on which maximum income is calculated.
Billy Mackay
Marketing Director
A J Bell