Thousands of pensioners face 50% drop in income

THOUSANDS of people invested in drawdown plans are facing a major pensions deadline which will cut their income in half. Their drawdown arrangements must end once they hit 75, and they could find themselves forced to crystallise their retirement funds when markets are at historic lows.

Scotland on Sunday examines their options and answers their questions.

Was drawdown a bad idea?

Not necessarily. It is simply timing and the markets that are causing headaches. Up to 20,000 investors across the UK are believed to have decided against fixing their income at retirement for the rest of their lives by buying an annuity, but opted instead to invest the cash in a drawdown scheme paying a regular income.

What was the attraction?

Firstly, the hope was that with good investment performance the fund would grow and, secondly, they could cash in on annuity rates which are far more generous at 75 than at 65. There can be tax advantages too. If they die, their pension could be left to their children, subject to a 35% tax charge.

Finally, it is possible to withdraw more each year from a drawdown scheme than you could via an annuity, which allowed money to be released more easily; another useful way of passing assets to the next generation.

What's the problem?

Once the plan holder reaches 75, the fund must either be used to buy an annuity or transferred into a different, and slightly less attractive, drawdown arrangement called an Alternatively Secured Pension (ASP).

However, most people's funds would have slumped by between 20% and a third over the past year.

Stuart Bayliss, of Annuity Direct, said: "It's hell out there if you are trying to make any kind of long-term investment decision. Undoubtedly your fund has been hammered and you're desperate for security."

Hargreaves Lansdown's Tom McPhail added: "We're surrounded by uncertainty, and investors are caught on the horns of a dilemma. Yes, markets should recover and annuity rates may stop falling, but there are no guarantees."

Are there any alternatives to buying an annuity?

There are, but all of them will see the income most drawdown holders live on halve.

Take someone who retired 10 years ago with a 500,000 pension pot which he placed in a drawdown arrangement. If he invested it in a pension fund with above-average performance, and took maximum income each year, he should this year have 44,000 to live off. But this income would have been calculated using last year's valuation when the fund stood at nearly 385,000. Since then it will, at best, have fallen by more than 20% and be valued at 260,000.

So the worst thing he can do is buy an annuity?