October Pension Drawdown Reviews and all-time low gilt yields

October 2011 sees a record low gilt yield of 2.75% as a basis amount to use when calculating pension drawdown income. Actually starting pension drawdown or QROPS or triggering a review of existing income should be approached with caution. Although there is no guarantee that the gilt yield will increase in the coming months, a review now could lock a client in to the lowest ever pension drawdown or QROPS drawdown rate.

Sometimes a review is unavoidable, such as reaching the end of an existing 5 year (or 3 year) reference period, and for those on the old, pre 6 April 2011 income limits of 120% of the older GAD tables, moving on to the new basis of 100% of the revised GAD tables along with the drastically low gilt yield could result in a significant drop in income.

Take a a 60 year old crystallising a pension back in October 2006 with a fund of £400,000. The maximum income they could have got, based on 120% of the GAD rate would have been £29,760 pa. Coming up to their 5 year review in October 2011 and aged 65 years, the new GAD tables and the post April 2011 maximum 100% GAD would give a new maximum pension drawdown or QROPS drawdown of £23,200 pa on the same fund of £400,000. Take a fund that has fallen by to approx. £330,000, then the new income level would be £19,140 pa. - A pension drawdown review dropping income by over £10,000 (35.68%).

Reviews of the maximum income are also trigged:

(a) When moving further funds into pension drawdown within the same arrangement,
(b) When using some of the pension drawdown fund to purchase an annuity,
(c) The start of the next pension drawdown year when transferring a pension drawdown fund still in an original 5 year reference period,
(d) The start of the next pension drawdown year if reaching 75 years after 6 April 2011,
(e) The member requests a review on their next pension drawdown year anniversary

The gilt yield to use for the following month is determined on the 15th of the preceding month, so shortly October for November will become clear.

Many pension providers and pension drawdown holders are pushing the government for reinstatement of the 120% limit.