Unsecured Pension Plan Income Reviews

17 August 2011

Grant Hughes of Charlwood Leigh looks at changes to the rules governing income from unsecured pensions.

 Amongst the raft of changes brought in by the coalition Government in 2010, were a range of changes to pension legislation governing such diverse subjects as allowable tax efficient contribution levels, death claim benefits and taxation of funds, and also on the maximum levels of income that can be drawn from some of the more sophisticated plans.

It is this last issue that I want to bring to your attention now.

For those clients who decided against buying an annuity when they retired, and instead used unsecured pension plans (which used to be known as “income drawdown” plans), there may be some rather nasty surprises in store.

You may remember that when your unsecured pension plan was originally set up, you could draw an income of upto 120% of the Government Actuary Department’s (GAD) annuity rate for someone of your age.  To sustain that income, your fund would have to perform well enough to replace the money you drew and cover all its costs.  The income level was reviewed every few months and the calculation was redone to set a new income level based on the new fund value and GAD rate.

In general terms, if the fund did perform well, you could look at a rising level of income over your lifetime as, in general terms it was supposed that, the older you get, the higher the GAD rate might get.

However, a number of circumstances have conspired to produce a situation whereby many people will get a much lower income from their income drawdown plan at their next 5 year review, than they are currently enjoying.

Most schemes set up prior to April 2006 were reviewed automatically during 2006, and therefore many are coming up for their 5 year review this year.  We have seen a number where the income has almost halved.  This is because:

1.    The maximum income allowed has dropped from 120% of GAD to 100% of GAD

2.    The funds have not performed quite as well as we had hoped due to the major stock market falls in 2008, and

3.    Despite the fact that clients are 5 years older, the GAD rate has actually fallen slightly because people are simply living far longer than they were a few years ago and due to the fact that gilt yields have changed.

These three factors have conspired to produce some rather scary income numbers.

Clients who were drawing the maximum levels of income over the last 5 years have, in general terms, eroded their fund and now will be looking at incomes which will be considerably reduced for the next 5 years!

BEST TO PREPARE EARLY!

It is important therefore that you prepare for this change in income and look at alternatives for using the pension fund, just in case there is a way in which you could make the income more sustainable or, indeed, in case an annuity might be a better strategy going forward.

We are attempting to contact all insurance companies to obtain review dates for  our clients with these income drawdown plans and estimates of what their incomes might be, but many insurance companies are loathe to prepare figures for us ahead of time.

If you have an unsecured (income drawdown) plan of this type and are worried about a fall in your income rate at the next review, please contact us so that we can discuss your situation, calculate some preliminary figures for you to think about and then look at some alternatives for you.

It is unfortunate that this situation has arisen.  The Government has seen fit to change rules which were well established, without, I think, considering the consequences to people who are using these plans.

A significant fall in income in retirement is not going to be comfortable for any of you.

I look forward to hearing from you if we can be of any help.