Liberty SIPP

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Income drawdown dilemma for pensioners

If you’re currently in income drawdown and coming up to your five year review period, be prepared to be in for a big surprise; and trust me, it isn’t a teddy bears picnic. Around five years ago a client would have had their maximum allowable pension income based on 15 year gilt yields of up to 5.25% and also would have been able to take 120% of this maximum. Furthermore, as long as the client had invested their money fairly sensibly, they would have been getting healthy investment returns compared to ones of late.  All of this rolled up together would have given the client a fairly reasonable pension income in comparison to their pot size.

Five years on, they’re going to be looking at a completely different picture. Firstly 15 year gilt yields are at an all-time low of around 3.25%. The government has reduced the maximum you can take from the GAD rate by 20% to 100%, and the economy could be heading into a double dip recession. Hence momentarily investment returns aren’t breaking records. Therefore pensioners could see their allowable income slashed by up to 50% when they approach their review date. This could result in a hefty change in lifestyle, at a point in their lives when there is little that can be done about it.

There is nothing a client can do to protect themselves against this, however Liberty clients benefit from the fact that we don’t charge fees for drawdown. I recently produced some market research looking at SIPP admin fees for a client in drawdown over a 20 year period against some of our closest competitors. We found that during the 20 year period our clients can make savings of up to £7,000 and this extra money could be used to invest or draw a pension from.

Sep 14, 2011