Income Withdrawal – What’s the low-down on Drawdown?

This post deals with a few of the key points concerning drawdown contracts. A more complete analysis of drawdown vs. annuities can be found in the Honister booklet available at this link.

A recent change in the rules has allowed people to enjoy a new option: “flexible drawdown” which allows pensioners to have complete flexibility over the sums they withdraw from their drawdown contract (subject to normal income tax), provided that they can pass a new minimum income requirement (“MIR”) of £20,000 per annum from other means. So, provided that you can prove to the Revenue that you have at least £20,000 of secure annual income p.a. in retirement from alternative sources, such as a final salary pension scheme or other annuities, you may withdraw as much as you wish from your flexible drawdown plan.

The flexible drawdown MIR is a one-off test, and once it has been satisfied you do not have to prove your income again in later years.

This contrasts, however, with another amendment in regulations which serves to reduce the maximum annual sums others may withdraw from their contracts, (i.e. those who cannot meet the new MIR statement of income from other means and so are presumably more dependent on their drawdown plans). They could previously withdraw up to 120% of the government actuarial department (GAD) prescribed limit, but this has now been reduced to 100% (in simple terms, the GAD limit is close to the £ amount that one might receive from a level single life annuity). This reduced GAD limit will apply from the next review of an existing drawdown plan.

One of the things that people forget about drawdown plans is that they may be converted into an annuity at any time. So if nothing else, they can be used to defer annuity purchase, especially for younger pensioners. But perhaps their greatest advantage over annuities is that after the death of the policyholder, a surviving spouse or dependent relative may simply take over the plan and continue to run it, without any special tax charge relating to the takeover. Thus the spouse / dependent relative (who will still be subject to income tax on the income), enjoys the benefit of the plan and may themselves convert it into an annuity for themselves in the future.

This is only a snapshot covering a few key issues. Give me a call on 0845 013 6525 and I’ll be happy to discuss drawdown and annuities in the context of your own retirement planning objectives.

World Markets, the Downgrade of US Treasuries and the Eurozone Crisis

I was always told that for any decent piece of written work, you should tell your audience what you’re going to tell them, tell them, then tell them what you told them.

So if you want to cut to the chase and not bother reading the rest of this article, then the message is this: if your long-term investment objectives remain unchanged, then you should not be too distracted by the recent slide in world markets, and remain invested. The last thing you should do is panic and sell in a weak or falling market.

So, what’s been going on? Not for the first time in recent years, world markets have fallen sharply, because of the sovereign credit crisis in the Eurozone, and worries about the US economy.

US Credit Downgrade The highly publicised downgrade of the US credit rating from AAA to AA+ by Standard and Poors was stated to be as much a judgement about the state of the political leadership in the US as well as the overriding sentiment that the proposed solution to the US debt problem is only a temporary fix and is inadequate long-term. There are still concerns about the political will in the United States to deal with the long-term debt of the country, which many feel is becoming too unwieldy for even the biggest economy in the world to handle.

This downgrade in credit rating has preceded an acceleration in the equity market falls over the last few days, most particularly in the US but also around the world including the UK. Strangely, the downgrade in credit rating should have pushed down the price of US Treasuries, but instead the opposite happened because of the falls in the equity markets, and investors turned as usual to Treasuries as a safe haven.

Eurozone Crisis In Europe they have their own debt crisis. Markets waited to see the European Central Bank (ECB) step in and support Spanish and Italian bonds. This failed to happen initially, which triggered a fall in investor confidence about Spain and Italy in particular, but also over the Eurozone generally and whether it can support its ailing members. The ECB support for Italian and Spanish bonds has now apparently come through, albeit a little late.

The combination of the two has pushed worldwide investor sentiment over the edge and brought about some fairly substantial drops in the international equity markets. However, at the time of writing this (Tuesday August 9) I see that initial drops in the FTSE today have reversed and it closed higher than yesterday, and that the S&P500 is already up on the day.

Should investors get out, at least for a while until things improve?

When markets are driven by sentiment and prices are volatile, it is easy to lose confidence and to decide to limit your losses and get out while you still can. This however is almost invariably the wrong thing to do. History has shown us that sharp falls in markets are usually followed by equally sharp recoveries. The classic example is to cite figures which show that someone invested in the FTSE All share index over the past 15 years would have seen returns of 168%, or 6.8% p.a. However, if that investor had been out of the market on the 10 single days of best performance over that 15 years, their return have shrunk to 45% or 2.5% p.a. You will never time the market properly, nor will the highly paid professionals.

So despite current uncertainty in markets, follow the lessons from history and make sure your portfolio is well diversified across different asset classes, that you choose your advisers carefully and see that your portfolio is maintained properly.

Don’t be a forced seller and stick to your long-term plans. You should not panic and sell in a weak or falling market. That advice has proved right in the past and I firmly believe it remains right today.

Fishing exploits no. 3 in a series of six billion…

I have to admit to being a fair weather fisherman, and I think young Andy is much the same. We are out most weekends when the weather is good, say May through September, but that’s about it.

Last Saturday was a very pleasant evening, and I fished just one rod instead of the usual two. When the fish are biting it’s pretty much impossible to fish two rods efficiently, and a single rod is much more relaxing. I again caught plenty of smaller carp in the sub two pound category, and the mirror pictured at around 3lb to 4lb was the best of the evening for me.

A nice place to while away a few hours - members lake swim 7

A nice place to while away a few hours

A nice little mirror carp

200 lb man triumphs over 3.5lb fish


Sooner or later one of those big ‘uns in the high teens / low twenties is going to end up in my net I reckon.

Until then, stay tuned…..

Protecting Investors’ Assets

One of the advantages of being an independent financial adviser in London is that we investment IFA’s are regularly invited to seminars where the top fund managers will turn up and discuss their wares. I can’t attend all of them of course, but I do go to a fair number, carefully chosen. I was at Commerzbank recently, who were hosting  Stewart Cowley, head of fixed income and manager of the Old Mutual Global Strategic Bond Fund, and John Ventre, a multi-asset manager with Skandia, covering Skandia Shield Fund, (a guaranteed fund with guarantees provided by Commerzbank) and Skandia Spectrum Funds.

The theme was “Protecting Investors’ Assets” I won’t bore you with the details, but I did enjoy listening to both Stewart Cowley and John Ventre’s predictions. The one which hit home with me was one of John’s : never mind Greece, Ireland and Portugal: the Eurozone may have a serious wobble on the horizon as he expects Italy to get into difficulty at some point in the fairly near future due, inter alia, to inefficient tax collection and a massive public pension funding problem. Crikey –  if Italy does a “ Greece” then the whole world economy is going to wobble, – seriously.

As for protecting investors’ assets, (and admittedly Cowley was rather preaching to the converted in my case since I have recommended his fund to many clients over the years, particularly more recently), Cowley believes his fund will do well since it has the comparative freedom of taking positions in currencies, taking short positions, and other means of earning profits in a falling market. He also in his accompanying flyer, concluded that ” in bond terms a mixture of inflation linked government bonds, high yielding corporate bonds and inflation plus targeting absolute return funds will be the most likely solution to traditional asset liability matching”. If you are a client of mine reading this, then you probably heard something similar from me in early January this year.

Of course one of the problems with such seminars is that the speakers almost invariably believe that now is a good time to be investing in their fund. A notable exception was Tom Dobell, the manager of the M & G Recovery Fund, who I remember seeing some years ago in the middle of the credit crisis and tumbling markets. There was much (rather exasperated) shaking of the head as he reviewed statistics and the current outlook at the time, and when asked how he thought his fund would perform over the next 12 months, actually replied that he did not expect to make any money at all and quite possibly a loss. Full marks to Tom for honesty, which is always refreshing. His fund is something of a market leader too.

So where does this leave us all? Where should we be investing our money over the next five years? Well I think the general answer is that the need to diversify has never been greater, and that one must review the traditional asset allocation models and be prepared to take tactical positions against those models if need be in order to secure an efficient balanced portfolio in the current world economy.

What does that mean? If you care about your money, get a professional involved. Most, like me, will take a preliminary look at what you have and discuss a possible better solution, without needing a commitment up front from you the client.

Fishing exploits no.2 in a series of six billion…

Well it was off to the members’ lake in Wakering for me and young Andy last weekend, and we weren’t disappointed. Considering we are relative novices it looked like we chose better swims than those who were there when we arrived, who we could hear lamenting they weren’t getting much. We were soon into fish and landed a good number of fair carp, mostly mirror, in the 1lb to 2lb range.

200 lbs man (you wish!) overcomes 7lb fish

200 lbs man (you wish!) overcomes 7lb fish

For me, having pulled plenty of smallish carp out from the middle, I tried my luck in the margins, a few feet out and 10 feet to the side, and was rewarded with one of my bigger fish. I don’t know what he weighed (I really must get a scale) but a guess would be 7lb-ish (?). Gave a good fight too.

Both went home tired but happy (Andy not so happy as me as my fish trumped his – heh heh).

Whole of Life insurance zz.zzz.zzz

OK some topics aren’t exactly exciting but this is supposed to be a financial blog after all.

Carrying on with the direct offer by post theme, Legal and General recently sent me an offer for whole of life insurance. The deal is that I am guaranteed to be accepted, but if I die from natural causes in the first two years it doesn’t pay. Also, if I lived to the age of 90, I don’t have to pay premiums thereafter but the cover remains in place.

Looking at the rates on offer, compared to standard rates I can obtain in the market, I see that as a healthy non-smoker, I can obtain more than double the cover with Legal and General themselves on the same type of plan for the same price. However, that route involves underwriting and a lengthy application form.

So whilst a plan like this is poor value for a healthy person, I guess it could well be attractive to somebody in less than good health, so long as they are not at death’s door.

And if you sign up you get £50 worth of M&S vouchers as a “birthday gift”. Yippee. Only it will take at least three months to arrive. 

So to re-cap, if you’re not in good health, want to insure your life, and fancy a socks and underwear shopping spree, you might want to sign up. But I recommend that you speak to an IFA first, as the simple route isn’t always the most economic.

Fishing exploits no.1 in a series of six billion…

Well it was off to Hanningfield Reservoir the other day for a spot of trout fishing. Also an early birthday treat for my fishing partner, Andrew, aged 13 and 364/365ths.


Before you go thinking I’m some sort of expert fisherman, I’m not. In fact what I gained wasn’t fish but more experience:

  • If you think it’s easy to spin for game fish e.g trout, try doing it for most of the day using a heavy carp rod. Next time I’ll get a lightweight spinning rod of some kind.
  • as for (a) above but try doing it on a boat.
  • yes, you can get sunburnt on a cloudy day in June if you’re not careful.
  • an “8 fish” ticket is probably a tad optimistic.

Well we did see the odd fish being caught but not by us this time. I suspect we’ll stick to carp. We can’t eat them but at least we get some action when we go to Wakering.

If you can’t trust your bank……

It seems to me that the BBC’s Panorama programme is getting a little lightweight. The June 13 program about banks’ selling practices was a good example of an opportunity missed.

It ‘s fairly common knowledge, at least in the industry, that product mis-selling has been going on amongst our high street banks for years, so the program wasn’t really telling us anything new. What they could have done, especially since they used undercover reporters, was go much deeper than they did.

For example, and quoting from Panorama’s site comments:

“ I was a Lloyds Bank manager who was glad to take early retirement in 1992, when the rot had already set in. As an example, shortly before I retired, Lloyds managers were told the bank prohibited them to grant a personal loan to a customer unless Payment Protection Insurance was sold, although customers could not to be told of this requirement as it was illegal.”

That’s pretty damning stuff and I suspect there’s a lot more where that came from.

Yet in this program, Panorama simply relied on a couple of individual cases, where the facts and dates were not fully set out, and then added some talking heads. The ”experts” brought on board to comment comprised (a) an IFA, (b) a representative of BestInvest, which is mainly an execution-only seller of investments, and (c) some old chap who called himself a claims adviser. Not one of those experts could be considered to be impartial.

The fact that one participant noted that she received full compensation after a successful claim with the Financial Ombudsman Service (FOS), but was still £000’s out of pocket due to the fees (or was it commissions?) paid to a claims adviser, was ignored by the reporters. Indeed they failed to point out to the viewing public that it costs nothing to complain to the FOS oneself.

I suppose the programme reinforced the general advice that banks are not always acting in your best interests. At no time did they suggest the alternative of using independent financial advisers, but they did, dangerously in my view, appear to promote the “do it yourself” approach since they found a smart recent retiree who had invested her own fund and was happy to do so. It’s not that easy, nor sensible, to try and go it alone, especially if you need that money to get by on.

Panorama could perhaps have mentioned, in a programme about complaints on financial products, that IFAs only account for about 1.5% of complaints raised with the FOS, but hey, that isn’t exactly a headline grabber.

Anyway, if Panorama are looking for any more IFAs to dish the dirt on the Banks in exchange for free advertising of one’s practice, I’m available! Otherwise, if you want a sensible portfolio of investments which matches your personal circumstances and appetite for investment risk (or lack of it), with no surprises, hidden charges or small print, you know where to come.

(Un)Friendly Society

The other day I received a big glossy pack from one of my family’s car insurers. I won’t say which insurance company, but if it was a butterfly it would be a red one.

It wasn’t car insurance they were selling, but an investment plan of some kind in conjunction with a Friendly Society. Again, I won’t say which one, but it’s to be found north of the border. Now, (as every good IFA knows) there is a quirk in our tax system (which goes back to the Battle of Hastings or Magna Carta or something) which allows individuals to invest in a Friendly Society plan and receive tax-free returns. The only problem is, the maximum allowed is £25 per month or £270 a year. So they tend to be mostly shunned by IFA’s and consumers alike since they are pretty trivial, especially when compared to ISA allowances.

Nevertheless, it sounded pretty good. Looking further at the glossy pictures and precious prose, I saw that one could actually invest greater than £25 p.m., but would incur tax at source on any excess premium. Fair enough. The investment was a 10 year plan and included a small amount of life insurance… aha! Yes it’s a Maximum Investment Plan too! – quite innovative, mixing up a friendly society plan with a MIP. The deal with MIPs is that if you hold them for a minimum term (e.g 10 years) no further tax is payable on growth even for higher rate or additional rate taxpayers.

But, as ever, the devil is in the detail. With my accountant hat on, I wanted to see the charges. Crikey! – 50% of the policyholders’ contributions in the first year would be deducted as a selling expense. Ongoing charges, (ignoring charges for the little bit of life insurance), were 1.5% AMC for a tracker fund (default) or the alternative managed fund. Oh, and there is a £1.00 a month plan charge deducted from the tax-free element, so that’s and extra 4% deducted every month against a £25 p.m. premium.

What I thought was a bit off, was that the charges were not really mentioned in the glossy letter which, when opened, became a very simple application form. Nor were they mentioned much in the small brochure, also attached. However, and as required by the FSA (hurray), there was a key features document with less pictures and lots of writing, setting out all the costs. Having found the charges, I looked for the reduction in yield figures over the 10 year term, and found that the tax-free plan would see a 7% gross investment return in the fund reduce to 3.4% after charges. In other words, more than half any investment growth would be lost in the charges.

Not exactly Admirable, eh? – and not so Friendly. Oh, but I forgot – they give you £15 in M&S vouchers for every plan you take out.

So that’s all right then.