Fiducia Wealth Management
Posted in Pensions & Retirement on 21.12.12

Whilst this is good news for those in drawdown, weak investment performance coupled with historically low gilt yields mean that many reaching review will still face a significant reduction in maximum income limits. In December 2007 the gilt yield stood at 4.5%, more than double the current rate of just 2.0%; and as an example, annualised returns over the last 5 years in the IMA Mixed Investments 20-60% shares sector have been just 2.52%[1]. The result of this perfect storm means that whilst a male aged 65 with a pension fund of £200,000 in December 2007 would have secured maximum capped income of £17,280 at that time, the calculation now would be just £13,358[2]. This is assuming the fund value grew by 1.5% per annum after charges with no withdrawals. If maximum income of £17,280 per annum had been taken, with growth of 1.5% per annum after charges, the resulting maximum income would be just £7,838 per annum[3].

The increase in GAD to 120% would result in an increase in the above figures to £16,030 assuming no withdrawals and £9,405 if maximum withdrawals had been taken over the previous 5 years. This eases some of the pain, particularly if a low level of income has been taken, however, for many a reduction of nearly 50% in income is still a possible outcome at review.

Pressure on gilts remain and there is little prospect for any prolonged or significant increase in yields in the near future. Investment performance remains challenging and real returns above income withdrawals will be small at best with capital depreciation more likely on portfolios where maximum, or near maximum, withdrawals are being taken.

There are calls within the pensions sector to remove the link between gilt yields and maximum drawdown calculations, however, with no mention of any such changes in the Autumn Statement pensioners cannot rely on a foreseeable change in the rules to alleviate the sudden drop in income.

So what are the options?

Firstly for anyone with a secured income of £20,000 per annum or more, flexible drawdown is available which is uncapped. Secured income includes State Pension, annuity and scheme pension income but excludes savings, investment or drawdown income.

Annuity rates are at an historically low level and with gender neutral pricing commencing on the 21st December, rates for men are likely to reduce even further. However, for anyone suffering from ill health or having other lifestyle factors, such as being a smoker or overweight, an enhanced annuity can provide increased levels of income. Such factors can also be taken into account for scheme pension and open annuity (a form of self-invested annuity).

For those who do not want to lock into a lifetime annuity, a fixed term option may be appropriate and could prove attractive whilst the current global economic storm abates.

Retirement income is not just about pensions and consideration should be given to other savings and investments to ensure they are working to best advantage. A portfolio of £100,000 could generate a further £5,000 of income each year and can be structured to avoid additional tax.


There is no easy solution to the current drawdown crisis and forward planning is essential to avoid any unpleasant surprises at review. Whilst a move back to 120% of GAD will ease the pain for some, anyone drawing this level of income is likely to see capital depreciation over time which is likely to result in a reduction in income at some point in the future. Constructing a sustainable, realistic retirement income plan which is tested against inflation and real rates of return is fundamental to a secure retirement.

At Fiducia we have a team of pension specialists who would be happy to discuss your current position and review your options. For a no obligation discussion please call on 01206 321045 or use the contact us section of our website.


[1] Source: Financial Express 18/12/2007 to 18/12/2012

[2] Calculated for male aged 70, fund value of £215,456 based on 100% GAD

[3] Calculated for male aged 70, fund value of £126,425 based on 100% GAD

If you would like to know more about how we as Financial Advisers can help you  with your Pensions and overall Retirement Planning then visit the Retirement Planning section of  our website: Retirement Planning  or send us email at: [email protected]

The information contained in our website is for guidance only and does not constitute advice which should be sought before taking any action. The information is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly, no responsibility can be assumed by Fiducia Wealth Management Limited, or any associated companies or persons, its officers or its employees, for any loss occurred in connection with the content hereof and any such action. Professional financial advice is recommended for every case.

Fiducia is a multi award-winning firm of Financial Advisers based in Dedham near Colchester situated in the heart of Constable Country on the Essex Suffolk border.

Fiducia Wealth Management Ltd. Dedham Hall Business Centre, Brook Street, Dedham, Colchester, Essex, CO7 6AD.

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Fiducia Wealth Management
Posted in Pensions & Retirement on 21.12.12