Valuable planning opportunities in a retirement market where the gilt yield has declined
In a low gilt yield environment, having flexibility within a pension arrangement can make a big difference. Options include either delaying taking pension benefits until the situation improves, or phasing money into drawdown, to benefit from any potential upturn.
Immediate income needs
Alternatively, some people may choose to use other savings as a means of providing for their immediate income needs, delaying the use of pension savings until later. Using other savings first, such as Individual Savings Accounts (ISAs), leaves the pension fund untouched and available for drawdown as and when the situation improves.
The changes made to the income drawdown rules in April 2011 means that more people can delay accessing their pension benefits as they no longer have to buy an annuity by age 75, which may help to provide greater flexibility at a time when people need it.
Phasing of money
Another consideration is the phasing of money into drawdown, to benefit from any potential upturn of both investment markets and gilt yields. By keeping some pension money back, and drip-feeding it in when stock markets and/or gilt yields improve, could mean creating a higher income level while inside a three-year review period. If the pension scheme is structured in the right way the higher income level should apply to the entire drawdown fund, not just the additional amount drip-fed in, making it an attractive solution in today’s investment market.
Care should be taken when considering this type of retirement income planning. If additional money is drip-fed into income drawdown when conditions are not favourable, for example, when gilt rates or investment markets have fallen further, it may have a negative impact on maximum income levels.
Option of annual reviews
Keeping some pension money back is a particularly good tactic for those who have a pension contract that does not allow them the option of annual reviews. If they only offer the statutory three-year review period, then people could have to wait a long time before they can benefit from any improvement in market conditions.
Planning opportunities
These kinds of planning opportunities may be particularly valuable in a retirement market where the gilt yield has declined, impacting the maximum income available from both income withdrawal arrangements and pension annuities.
The cap on the maximum amount of income someone can withdraw from their pension can be a cause of real frustration for many people. However, there are alternatives to help people improve their income levels.
A pension is a long-term investment. The fund value may fluctuate and can go down as well as up. You may not get back your original investment. Past performance is not an indication of future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.
