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Income DrawdownWhat is Income Drawdown, GAD and how does it all work?

Income drawdown (or capped drawdown as it is now known) allows you to take a tax free lump sum from your pension of up to 25% of the total value, while the rest of the pension fund remains invested.

It’s an ideal way to strip out a pension in stages in order to dramatically reduce the amount of tax that would be paid.

Income Drawdown

From the invested element you can choose to take an income. Since April 2015 there has been no restrictions on the income allowance from a pension, meaning a retiree can take any income between zero and the full fund value, subject to taxation.

 

Income Drawdown Calculator

 

The following income drawdown calculator gives a guide as to what income can be taken form an Income Drawdown Contract.

 

 

Income Drawdown Calculator

 

 

What is GAD and why is it important?

 

GAD (Government Actuarial Department) rates are set by the government each month. They are announced on the 15th of the month and apply from the 1st of the month following the announcement.

 

Previously GAD rates were used to set the rate of income someone can take from an income drawdown contract. Since April, although the GAD rate will no longer generally determine the maximum income savers can take from their pension, it will retain relevance for those remaining in capped drawdown and not falling foul of the lower Money Purchase Annual Allowance limit.

.

GAD Table

 

Year

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

2013

2.25%

2.50%

2.75%

2.50%

2.25%

2.25%

2.50%

2.75%

 

 

 

 

2012

2.50%

2.25%

2.50%

2.75%

2.50%

2.25%

2.25%

2.00%

2.00%

2.25%

2.00%

2.00%

2011

4.00%

4.00%

4.25%

4.00%

4.00%

3.75%

3.75%

3.50%

3.25%

2.75%

3.00%

2.50%

2010

4.25%

4.25%

4.50%

4.50%

4.25%

4.00%

4.00%

3.75%

3.50%

3.50%

3.50%

3.75%

2009

4.00%

3.75%

4.00%

3.25%

3.75%

4.00%

4.00%

4.00%

4.00%

3.75%

3.75%

4.00%

2008

4.75%

4.25%

4.50%

4.25%

4.50%

4.75%

5.00%

4.75%

4.50%

4.50%

4.75%

4.50%

2007

4.50%

4.50%

4.50%

4.50%

4.75%

4.75%

5.25%

5.25%

4.75%

4.75%

4.75%

4.50%

2006

4.00%

3.75%

4.00%

4.25%

4.25%

4.50%

4.50%

4.25%

4.50%

4.25%

4.50%

4.25%

2005

4.25%

4.50%

4.50%

4.75%

4.50%

4.25%

4.25%

4.25%

4.25%

4.00%

4.25%

4.25%

2004

4.75%

4.50%

4.50%

4.75%

4.75%

5.00%

5.00%

5.00%

4.75%

4.75%

4.50%

4.50%

2003

4.50%

4.50%

4.25%

4.25%

4.50%

4.25%

4.00%

4.50%

4.50%

4.50%

4.75%

4.75%

2002

4.75%

4.75%

4.75%

5.00%

5.00%

5.25%

5.00%

4.75%

4.50%

4.50%

4.50%

4.50%

 

 

Income Flexibility

 

Income Drawdown offers the option to change the income taken, stop income
altogether or invest in another product to produce a pension income like annuities or fixed term
annuities if the rates offered form these investments improves in the future.

 

Investment Choice

 

After the tax free cash has been taken (If required) the investor then has the choice of where to invest the balance of the funds. Lower risk investments are unlikely to produce investment returns that can replace the income being taken particularly if the maximum allowable is chosen. 

 

Higher risk investments have a better chance of producing returns to cover income withdrawals and could even allow some capital growth. However higher risk investment funds can show greater loses during periods of market volatility which can lead to an erosion of capital.

 

 

There are thousands of funds in which to invest including:

 

  • Cash
  • Fixed interest
  • Managed funds
  • Individual shares
  • Structured products
  • Property funds
  • Commercial property
  • Global equity funds

 

Phased Drawdown

 

For some investors who do not require the Tax Free Lump Sum, they can choose Phased Drawdown whereby part of the income they receive from the plan is from the tax free element and the other form the rest of the funds. This means that one quarter of the income is free from income tax.

 

Death benefits of Income Drawdown

 

There have been new rules in place since April 2015 that allow drawdown pensions to be passed to any named beneficiary on death.


Taking Financial Advice

 

Taking financial advice from a fully qualified financial advisor is crucial when Income Drawdown is considered. The financial advisor can help with the selection of the right income levels and investment choices based on the investors ATR (Attitude to Investment Risk)

 

The Risks

 

Income drawdown will not be suitable for everyone. Unlike an annuity there is no guarantee that
an income will be paid for life. Withdrawals may erode the pension fund and annuity rates may be
lower in the future, leading to a reduced level or loss of retirement income.

 

Drawdown contracts will generally be subject to higher charges than purchasing an annuity. Income drawdown requires ongoing monitoring of the plan and as a consequence charges are higher for income drawdown than annuity purchase.

 

 

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