Why we need to change the income drawdown rules

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Income drawdown used to be the smart investors' way to make the most of their pension pot but falling annuity rates and government changes have left pensioners wondering why they bothered taking this risky route in the first place.

The majority of people turn their pension pot into a retirement income by buying an annuity but unfortunately once the annuity is bought there's no getting out of the contract – the income you buy is the income you get.


As a pension is usually the biggest asset a person owns after their property, locking it into one insurance contract wasn't an attractive option for many. The inflexible nature of annuities led people into income drawdown.

For the uninitiated income drawdown is where your pension pot remains invested and you take an income from it every year.


The amount of income you can take each year is determined by the Government Actuary's Department (GAD) and are known as GAD rates but these rates are linked to annuity rates. As annuity rates have fallen so has the amount of income that can be taken in drawdown.

The one saving grace of drawdown was that you could take 120% of the GAD rate as income but the government has revised this down to 100% effectively bringing them in line with annuities.


As you can imagine pension providers aren't happy about drawdown essentially becoming a version of an annuity but with more risk because the money remains invested and unlike an annuity there is no guaranteed income to last your lifetime.

AJ Bell has been at the forefront of a new campaign to change the rules around drawdown. Although pension companies have a vested interest in enabling people to buy different retirement products, retirees should be pleased they have someone fighting their corner.

There needs to be a sensible solution to the issue of drawdown, you can't expect people to have faith in new and innovative products if the rules are changed and there is no benefit from taking extra risk.

I agree with AJ Bell that the maximum GAD rate of 120% be reinstated and that the government stops using 15 year gilt rates as a basis on which to determine income. Those in drawdown haven't kept their money invested to put it all into low-yielding gilts, they are investing their money to increase their wealth.

For investors, gilts just don't cut it anymore – the government need to catch on.


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