The Isle of Man’s pensions landscape has evolved radically over recent years with the introduction of the Pension Freedom Scheme (PFS) enabling people to take their pension fund in whichever way they wish (subject to some restrictions).
However, before the days of PFS, a pension fund had to provide an income at retirement by either purchasing an annuity or calculating a drawdown schedule to ensure an ‘income for life’.
The following relates purely to those Isle of Man pension arrangements that are not PFS and that require an income for life to be provided.
What is pension drawdown?
Pension drawdown is taking money out of your pension pot to live on during retirement while the rest remains invested. To initiate this, your pension provider (assuming they offer drawdown) should calculate a drawdown schedule for you. Put simply, this illustrates how much you are allowed to take from your pension pot each year in order to achieve an ‘income for life’ (i.e. the ‘pot’ of money you have in your pension plan will never dry up during your lifetime).
The drawdown schedule calculation takes into account several factors including (but not limited to) your current fund value, predicted life expectancy and estimated fund growth, to provide you with a suggested annual pension.
Addressing your questions
Upon receipt of a drawdown schedule, our members often have questions (which we are, of course, happy to answer). Therefore, to support anyone in, or considering, pension drawdown (whether they are Boal & Co members or otherwise), I have taken some of our most frequently asked drawdown schedule questions and addressed them below.
How do you know how long I will live?
A difficult one, and the actual answer is - we don’t! However, there are statistics going back well over a century on life expectancy and what we do is base our estimate on the average life expectancy of someone your age. As your life expectancy increases the older you are, we will re-visit this periodically, typically once every three years prior to age 75 and yearly after age 75.
What happens when my fund goes up or down?
Unless your fund is fully held in cash, the value of your fund will change on a daily basis. Some days it will go up and some days down, but hopefully over time the invested element will grow. Given that we use a value at a specific time to calculate your projected income levels, as with the life expectancy assumption, we will re-visit this periodically, typically once every three years prior to age 75 and yearly after age 75.
Is it guaranteed?
The level of sustainable income is not guaranteed for life. Simply put, should the value of your fund at each review date be higher or lower than the assumption we have used in the previous calculation, the level of sustainable income will reflect this when we re-calculate at each review.
What is GAD?
The UK Government Actuary Department (GAD) has produced a table showing the amount of sustainable income that could be produced for life from an investment into guaranteed UK government gilts – with the amount increasing or decreasing dependent on the gilt yield at the time of calculation. This table also uses actuarial life expectancy rates, meaning that the older you are, the higher the level of income will be.
When the concept of drawdown was introduced, as an additional option to the traditional annuity purchase, pensions were still required to provide an ‘income for life’. To determine this, the use of UK HMRC GAD tables was chosen as an independent source to determine how much an ‘income for life’ would be.
Why am I (only) allowed 150% of GAD per year?
To allow some flexibility in the levels of income permitted, while still incorporating the ‘income for life’ concept, an Isle of Man resident individual using drawdown could currently choose to take any amount from a minimum of 0% GAD (or 35% from age 75) to a maximum of 150% GAD.
The ability to take up to 150% of GAD is to allow individuals to maximise their income where higher withdrawals are required over a short-term period (e.g. paying off debt or unexpected expenses) while still ensuring they do not run out of money too soon.
Why do you do 150% of GAD but my IFA does 100% of GAD?
We illustrate the maximum amount you are able to take. This doesn’t mean we are recommending that you do that. Your adviser, however, is more likely to suggest the amount that would be sustainable for your lifetime.
Even though you are permitted to take 150% of GAD, if you do so over a sustained period, you are likely to have the amount you can take reduced substantially at every review date. Essentially, taking 150% of GAD would result in your pension decreasing and not increasing in line with inflation as your remaining funds will be reducing too fast.
Why is the drawdown year based on when I take my PCLS and not the tax year?
PCLS stands for 'Pension Commencement Lump Sum'. It is an amount payable as a lump sum when you commence payment of your pension income.
If you decide not to take any pension income following your lump sum, you have still technically ‘commenced pension’ but at a rate of 0% of GAD and your drawdown schedule calculation is therefore made at this stage.
Why does the yearly drawdown amount not rollover – e.g. if I don’t take in year 1 why can’t I take 2 lots in year 2?
Income for life is payable, and the maximums are set for each year, between the minimum and maximum amounts. Each pension year is separate. The maximum GAD limits how much can be withdrawn in each pension year, based on your age and gilt yields. This limit applies to each individual pension year, and you can therefore not roll over any unused allowance to the next year.
Why are you assuming I’m single?
Annuities for drawdowns are based on single life, regardless of your marital status. If you did have a dependant on your death, the balance remaining could be used to provide an income for them.
Why does my Drawdown Schedule look different to the Benefit Statements I have been issued pre-retirement?
Your benefit statement has to be produced using certain guidelines and prescribed assumptions. This basis is different to the calculation of GAD.
If you wish to have a tailored statement of your options, you will need to get in touch with your financial adviser who can discuss this with you.
Can my drawdown schedule make allowances for my state of health?
The calculation of GAD does not consider your state of health.
If a registered medical practitioner evidences that you have a life limiting illness and discloses a specific prognosis, the actuarial team can allow for this and calculate a sustainable pension amount tailored to your impaired life expectancy. Only under these conditions, and subject to prior consent from the Isle of Man Income Tax Division, could this enhanced amount be taken instead of GAD.
Further, in the event that a registered medical practitioner confirms in their prognosis that you have less than 12 months to live, allowances can be made to enable you to withdraw your entire pension pot, subject again to prior consent from the Isle of Man Income Tax Division, and to the deduction of any applicable tax that is due.
Drawdown schedules explained
Hopefully, this has helped you to better understand your drawdown schedule. However, if you are in doubt about what to do, it’s best to chat things through with your financial adviser. Alternatively, if you have a Boal & Co pension, feel free to contact me, or any member of our actuarial team for assistance.
Your pension is not guaranteed, either by Boal & Co, your pension provider or your financial adviser. Ultimately, your available retirement income will fluctuate according to the value of your retirement fund, including its investment return. If a guaranteed pension amount is important to you, you may wish to consider an insured annuity instead. This should be discussed with your financial adviser.
This article is written in general terms only and should not be taken as advice. Boal & Co does not provide investment or financial advice.
