The government have announced a further increase to the rate used to calculate the income received by customers who use an income drawdown contract.
The trade newspaper Money Marketing reported on 19th December, that this rate has increased by 1% in the last 12 months and currently stands at 3.25%. But what does that mean for drawdown users ?
Unlike a conventional annuity where the amount of income is set for life, income drawdown customers have more flexibility and control over how they take their income. There are a number of potential benefits for customers which include the ability to turn their income on and off, to set it at a level that meets their needs (subject to the maximum limit) and if they achieve good investment returns, there is also the potential to increase the value of their fund and / or retirement income. Of course the reverse side of the coin is that poor or negative investment returns would have exactly the opposite impact with the fund value falling and therefore the potential maximum income.
Many customers whose primary concern is to take the maximum income possible from their pension fund, and a willing to take a longer term risk on the income being sustained into the future, opt for a drawdown contract. The income calculation method which we will discuss below means that typically a customer will initially receive considerably more income using a Drawdown contract than they would if they used an annuity.
The maximum possible income a customer can take from their drawdown contract is based on the following variables – The customer’s age, their fund value and anticipated mortality levels. This information is used by the Government Actuarial Department (commonly referred to as GAD) to produce tables used by Drawdown providers to calculate the maximum income. As an example the variables above may indicate that a customer could take £5,000 per annum. The customer has the choice to take anything between 0% and 120% of this figure. This means that the customer can take a maximum income of £6,000 per annum if they wish.
The GAD calculation is constantly revisited for the duration of the contract, these reviews (based on the variables discussed above) can result in the potential maximum income either going up or down, or possibly remaining the same.
If you want to understand more about income drawdown contracts and receive quotes showing the difference between drawdown and an annuity call us on 020 33 55 4827 and a member of our team would be more than happy to provide further information.