Wednesday, September 7, 2011

Pensioners face 40-percent income cut: UK

This devastating fall in pension payments is the result of a triple whammy hitting income drawdown: declines in the stock market, falling returns on gilts, which are used to calculate maximum incomes from drawdown, and a change in the rules governing this calculation.

Many pensioners will see their incomes cut when their drawdown plans come up for review. These reviews, conducted by the pension plan manager, have to take place five years after drawdown began, and every three years thereafter. (New plans are now reviewed for the first time after three years.)

Anyone who started income drawdown following "pensions simplification" on "A Day" – April 6 2006 – will be facing their first review about now. "Most of the first set of five-year drawdown reviews would have kicked off in April or May of this year, and will be gathering pace at the moment," said Vince Smith-Hughes of Prudential, the insurer.

Here we explain how income drawdown works, why such huge reductions in income can take place and what pension savers can do about it – whether they are about to take an income from their pension pot or have already embarked on income drawdown. more