The amount of income an investor withdraws is generally reviewed ............

Question: The amount of income an investor withdraws is generally reviewed every five years, but income drawdown investors may wish to make more frequent assessments of their situation…….a true statement? And what are the pro’s of making such regular assessments?

Answers:

Fiona Tait-  Scottish Life

A review of the maximum income that a client can withdraw must be undertaken every 5 years, however I would definitely suggest that any client who is taking income you should review the plan taking more frequently.

The frequency that you decide to review is to some extent dependent on the clients age and proximity to annuity purchase and they amount of income they are actually taking, however I would support the FSA's view that this should be at least annually.

The major issue is simple - if a client withdraws money from their plan there will be less left to buy an annuity, and the more they withdraw the bigger the impact on the fund value. Clearly if the client is withdrawing little or no income the plan would not need to be reviewed as often as if they are taking maximum income and/or are very close to purchasing an annuity.

If the income level is not reviewed regularly enough the client could end up with a much reduced annuity purchasing power without realising it. Carrying out a regular review, not just of the level of income withdrawal but also the investment strategy and the the clients ongoing needs, allows you check whether the annuity purchasing power of the fund is being maintained, and if not to at least manage the client's expectations and take appropriate action where required.

Stewart Dick - Hornbuckle Mitchell

Yes, certainly a true statement! Under Unsecured Pension (USP) rules the income must be reviewed at least every 5 years, but it would certainly be prudent to asses the income more frequently - bearing in mind of course that a review does not necessarily mean that the income has to be changed.

From an advisers perspective regular income reviews with the client will help strengthen your relationship and often lead to other areas of discussion that present additional opportunities to advise and earn. This is particularly true when looking at income levels as it naturally needs to be considered in conjunction with other assets and sources of income, estate and IHT planning, involvement of the spouse or partner, possible involvement of children etc..

Regular reviews also help the client understand their income levels and helps manage their expectations. If somebody who went into USP a couple of years ago was to review their income now the chances are that the maximum will have dropped significantly as a result of the double whammy of falling fund values and historically low GAD rates (The current GAD rate of 3.75 is significantly less than 4.50 in November 2007, and in April this year we saw a rate of 3.25 - the lowest ever). Regular reviews can help prepare the client for changes in income, and also allow some pro-active management of the underlying investments to maximise the fund potential

Vince Smith-Hughes - The Prudential

Though the GAD reviews are every five years, it is indeed a good idea for investors to review with their adviser the income being taken at least annually. We are aware some advisers do so even more frequently.

By reviewing income on a regular basis the adviser and the client are able to:

1) Determine if the income is still appropriate to the clients needs and tax situation. It may be appropriate to increase or decrease the income.

2) Determine if the income being taken is putting an unacceptable strain on the fund, and if so a decision can be jointly made whether this situation is understood but continued, or alternatively income is reduced.

3) Plan which fund future income payments are to be taken from. This may also involve moving to less volatile funds and perhaps even cash as a short term home to pay the income.

4) Ensure that the drawdown is still an acceptable part of the clients overall retirement planning. The drawdown element is often only a part of an overall strategy.

In general terms the most successful drawdown strategies are ones which are kept under review as the drawdown continues. Advisers also need to start thinking about drawdown exit strategies as the client approaches 75

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