The fall in gilt yields had a great impact on the maximum drawdown rates, as illustrated in Chart 1, with 15-year yields dropping from 5.25 per cent to 2.25 per cent. Susan’s drawdown rate therefore fell from 7.1 per cent to 5.1 per cent, resulting in her maximum pension reducing to £22,440 pa. The validity of the drawdown rates is also brought into question as they drifted away from market annuity rates, as shown in the chart.
Of course, had Susan followed an investment strategy that matched gilt yields, this fall could have been compensated by investment performance. The relatively good fund performance of her Sipp should be taken in the context of being good compared with what was expected in 2007.
The combined impact of all of these factors can be seen in Chart 2, which breaks down the fall in the amount she could draw.
Future increases
For clients affected by these issues, there are two pieces of good news.
At Susan’s next compulsory review date, her maximum drawdown will be based on male rates following the ruling by the European Court of Justice that insurance products should not take account of gender.
This affects drawdown as male rates are to be used for everyone until unisex rates are brought in once the annuity market has settled. This means Susan’s drawdown rate will be some 7 to 8 per cent higher, as seen by the sharp rise in her spot Gad rate in Chart 1 at the end of 2012.
Second, and more significantly, the 20 per cent uplift has been restored for drawdown years starting on or after 26 March 2013. While this sensibly does not require a compulsory review – the maximum just increases by 20 per cent – it is up to drawdown providers to implement this. Some may delay bringing in the 120 per cent maximum due to necessary system amendments or even charge due to payroll records needing updating.
It is important to note, however, that both of these amendments do not change the actual level of sustainable pension that is appropriate for Susan to draw if she requires a stable pension for life. They change the pace at which Susan can draw her income, but they do not create additional wealth for Susan.
The ability to draw more out in earlier retirement years may, of course, be precisely why Susan opted for drawdown in the first instance; that is why it was important for the government to bring back an element of flexibility for those in drawdown. Sipp-holders approaching or in drawdown now need confidence that further changes will not be made.
