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Unsecured Pension (USP) was introduced by the Government in 2006 with the maximum income set for five years, based on 120 per cent of the Government Actuary’s Department’s (GAD) rate at the time benefits were taken. Many starting their drawdown in 2006 will now be due for their five-year review, and where an individual has been taking higher levels of income, a reduction in their pension going forward could have significant effects.
The five-year review process involves taking the current fund value, applying the appropriate GAD rate to that person’s age and gender based on the underlying Gilt rate, and multiplying it by the maximum income factor. The cumulative effects of changes to these four elements between 2006-2011 are outlined below:
The last five years have seen some outstanding growth on funds with correspondingly large falls in 2008/2009. The two main asset classes held by self invested pension schemes, UK equities and property, show that their annualised growth over the last five years has been 4.54 per cent (FTSE All share) and -0.47 per cent (Investment Property Databank). As a result, in many cases this has not been high enough to sustain the levels of income being drawn.
As part of the changes introduced from April 6, 2011, surrounding the removal of compulsory annuitisation at age 75, HMRC published a new set of GAD tables to be used when calculating the maximum allowable income a scheme member may draw from their pension. The more significant changes resulting from this update, are for scheme members approaching the age of 75, where the new GAD rates are lower than the old ones. For example the GAD rate for a 65 to 70 year old male has been reduced by between 3 per cent and 6 per cent, which reduces maximum income.
In 2006, Gilt yields were typically between 4.25 per cent and 4.5 per cent. More recently they have been around 4 per cent, but have fallen as low as 3.5 per cent.
Maximum income is likely to be the biggest factor reducing the amount that can be drawn. This is because the above calculation is multiplied by maximum income factor and this has been reduced from 120 per cent to 100 per cent post April 6, 2011.
For further information, contact Kerry Houghton on 01772 555073.