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Adviser  >  Technical Central  >  Pre simplification  >  PersonalPension/Stakeholder  >  Income Drawdown Terminology Explained

Income Drawdown Terminology Explained

The content of this page is based on our understanding of how pensions worked before A-Day, the 6 April 2006, and is provided for reference only.

Our at a glance guide aims to explain the main terminology you will come across under Income Drawdown. 

Feature

Explanation

Mortality drag

This is the loss of the cross-subsidy that would have been available had an annuity been purchased (see mortality gain). This cross-subsidy is lost when a client enters income drawdown, as they are not part of a pool of annuitants.

Mortality gain

Insurance companies place all annuitants within an annuity fund or ‘annuity pool’. Annuity rates are calculated based on the average life expectancy of all those within this fund using mortality tables. Those who die early subsidise the annuitants who live beyond their average life expectancy and this cross-subsidy is termed ‘mortality gain’.

Critical yield

For Income Drawdown (ID) plans there are normally two types of critical yield. These are:

  • Critical yield A - the investment return needed on the ID fund sufficient to provide and maintain an income equal to that which an annuity could offer (normally based on a single life, level annuity without guarantee).
  • Critical yield B - the investment return required on the ID fund to maintain the selected level of income taken.

Critical yield B cannot be given alone, it must be accompanied by Critical yield A.

Income drawdown limits

The amount of income that can be taken under an ID plan is restricted between two limits:

  • Maximum GAD - maximum level of income that can be taken. Based approximately on a level, single-life annuity using tables issued by the Government Actuary’s Department (GAD) and the FT Actuaries Fixed Interest Indices.
  • Minimum GAD - minimum level of income that can be taken. Equal to 35% of maximum GAD limit.

Income, at any level, can be taken between the maximum and minimum limits. The limits apply until the next triennial review.

Triennial review

The minimum and maximum GAD income levels are recalculated every 3 years. The client’s age, GAD rate and fund available at that time determine the new GAD levels that will apply for the next 3 years. This process is repeated up to age 75 when an annuity must be purchased.

Gross redemption yield

This is the yield currently available on UK gilts (15 year rate used for clients or 5 year rate for children) which is used in the calculation of GAD income limits for ID which are published in the Financial Times. The rates used are based on the 15th day of the month immediately prior to the start date (calculation date) for the ID plan.

Vertical segmentation

This allows you to select the investment fund that income withdrawals are taken from. For example a cash fund can be selected for the first couple of years income withdrawals.

 

 

Investment returns may fluctuate and are not guaranteed. The price of units may fall as well as rise.

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice.

 

Published 29 April 2004


 

For professional advisers only