Income Withdrawal – GAD or Bad
Income Withdrawal was introduced in 1995 as part of the Finance Act. It was originally designed to allow personal pension holders to defer the purchase of an annuity until the age of 75 whilst taking withdrawals directly from their pension pot. In 1999 individuals with money purchase Occupational Schemes also where able to take advantage of income withdrawal.
The original purpose of Income Withdrawal which is also known as Income Drawdown was to help those taking retirement to avoid being locked into low annuity rates of at the time of their retirement. Income Withdrawal also allows continued management of the investments of their pension fund that in theory allows the achievement of a higher income later in retirement, and also the ability to have better death benefits than a conventional annuity.
Withdrawals can be made from the pension fund with the balance continuing to be invested. The withdrawals are subject to a maximum level which is determined by a set of annuity tables produced for the HMRC by the Government Actuary’s Department (GAD). Individuals taking withdrawals using income withdrawal used to be able to take up to 120% of the rates set out in these tables. In April this cap was cut to 100% as well as the removing the obligation to buy an annuity by the age of 75.
As a result of reductions in annuity rates caused by the falling in gilt yields, this cut in the maximum withdrawal level and temperamental stock markets, payouts received by individuals will be cut when income levels next come up for review, every 3 or 5 years (dependent on when the plan was taken out) for those under 75 and every 1 year for those 75 and over. As well as the reduction in income pensioners the growth on the balance of the fund still being invested may also not achieve what was once expected.
Author: Robert Trapnell- Right Retirement
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