By GAD! Drawdown yields to lower levels
Without warning, new Government Actuary’s Department (GAD) tables for capped drawdown suddenly appeared from HM Revenue & Customs (HMRC) on 18 January 2017.
"The new GAD tables mean that any reduction in the gilt yield below 2% could potentially reduce the amount of income that those in capped drawdown can take."
For those in capped drawdown, the maximum income that can be received in a ‘drawdown year’ is calculated by reference to the individual’s age, the value of their pension fund, and a rounded 15-year gilt yield, as at the date of the calculation.
The GAD tables provide a monetary amount, (for example, £53 per £1,000 in drawdown), based on the age of the saver and the rounded gilt yield.
The calculation (see below) produces a ‘basis amount’ (that aims to replicate a lifetime annuity rate) which is then multiplied by a factor of 1.5, in order to determine the maximum annual gross income figure for capped drawdown. You should note that there is no suggestion that the maximum income figure is a sustainable level of withdrawal: indeed it is highly unlikely to be.
Until the new table appeared, the lowest gilt yield figure on the GAD tables had been 2%.
However, the new tables reflect the recent fall in gilt yields, as the minimum 2% level is being reduced to 0%. However, this doesn’t mean that no drawdown income at all is allowed, if the gilt yield figure being used is 0%. It just means that the income cap is lower than would have been the case at 2%.
Although the gilt yield figure - for capped drawdown purposes - has been held at 2% for the past year, the true 15-year gilt rate has been notably lower than that, (particularly in the immediate aftermath of the ‘Brexit’ vote).
The new GAD tables mean that any reduction in the gilt yield below 2% could potentially reduce the amount of income that those in capped drawdown can take, as the following case study serves to illustrate.
Case study
Donald is aged 65 and has a SIPP with a fund value of £200,000 as at the review calculation date.
If the current 2% gilt yield ‘floor’ applied at the calculation date, then Donald’s maximum capped drawdown income would be £15,900 gross per year.
The calculation is;
£200,000 (the SIPP fund value) x 53 (the GAD figure for a 65 year old and a 2% gilt yield) = £10,600,000
£10,600,000 is then divided by 1,000 and the resulting figure (£10,600) is then multiplied by 1.5 = £15,900
However, if the gilt yield was 1.75% instead, the calculation would result in a maximum capped drawdown income of £15,300 gross per year, because the relevant GAD figure is 51, as opposed to 53.
This means that, where the gilt yield is 0.25% less than 2%, the maximum income for Donald could be £600 per year lower, as 1.75% trumps the previous ‘floor’ of 2%.
Dismayed as he might be, Donald should avoid any rash and intemperate reaction to this new, lower ceiling and, as with other drawdown matters, would be well-advised to speak to his financial adviser. For instance, although he could escape the cap altogether by moving from capped drawdown into flexi-access drawdown, this is a one-way-only move that triggers the money purchase annual allowance, which itself is expected to be seriously reduced imminently.
When do the new GAD tables apply from?
When the new tables appeared - via a GOV.UK website alert - HMRC omitted to mention the date that the tables would take effect from.
When questioned about this, their initial response was that they would first apply to drawdown calculations conducted on and after 6 April 2017.
However, when their Pension Schemes Newsletter 84 was subsequently published, HMRC said, “please note that the extended tables apply from 1 July 2017 rather than 6 April 2017…to give you more time to update your systems”.
“With the publication of the new tables, the minimum level of 2% referred to in Pension Schemes Newsletter 51 no longer applies. Where the UK gilt level is between 0% and 2% the new tables should be used. Should the gilt level fall below 0% then the scheme administrator should calculate the basis amount using the gilt yield figure of 0%."
Thankfully, therefore, pension scheme administrators have time to build the expanded GAD tables into their drawdown illustration and calculation processes, whilst providers and advisers have the opportunity to inform their clients of the forthcoming change, in order to pre-empt any unwelcome surprises in future.