Capped Drawdown Income Fall

Capped Drawdown Income Fall.

Whilst the newer concept of ‘flexible drawdown’, where you can draw as much or as little from your pension fund in retirement as you want, is still headline news, the older type of pension drawdown, known as capped drawdown, still remains as many people took out capped drawdown pensions before the new rules started.

Capped drawdown works on the basis that every 5 years, the maximum income you can draw from your pension fund is linked to the equivalent annuity rate that you could buy today based upon age today and the yield from a 15 year gilt on the 15^th day of each month as published in the FTSE UK Gilts Index.  This is currently 2% pa.

This rate is then set by the Government Actuary’s Department (GAD).

Gilts are stocks issued by the British Government when it borrows money.  It is the interest rate coupon that the British Government pays on new debt.  Currently, the Government is enjoying a period of low interest rates and indeed the perceived security of the British Government in its ability to repay its debts is high, meaning that it pays low interest rates when borrowing.  This is unlike Greece that must pay much higher interest rates to borrow.

What does this all mean for capped drawdown?

As gilt yields are low, annuity rates are therefore low.  This means that the maximum amount of income you can draw from your capped drawdown pension may be much lower when it is up for its 5 year review.

If you do have capped drawdown pension, expect your maximum income facility to fall.  This does not mean your investment funds are performing badly or indeed better, it simply means that the maximum income you could have got with an annuity has fallen so the maximum you can withdraw using capped drawdown will also fall.