Cash clinic: Use review to mull over your options for income drawdown I have an income drawdown plan that is approaching its first review. I have been told by my pension provider that the maximum income that I can take will be virtually halved. This has obviously come as a shock. Please explain the causes for this and my options at this stage. MC Dunblane Although this will offer little comfort, you are in the same position as many others who hold income drawdown plans that are approaching a scheduled review. There are four main factors that could have contributed to your reduced level of income. The first is that, since you took out your plan, the government has introduced legislation that has reduced the maximum income that you can draw from the fund. This applies to all plans affected after 6 April, 2011, but only came into force at the first review for plans taken out before this date. This has the effect of reducing the maximum income drawdown level available for most drawdown plans by roughly 17 per cent. Changes proposed in the autumn statement intimate provision to increase the maximum income from drawdown arrangements by 20 per cent. This may provide a little relief. The maximum level of income available at review depends on the value of the pension drawdown fund remaining. Poor investment performance over years may have reduced your investment funds, especially if you have been taking the maximum permitted income. If the level of income you are taking is greater than investment growth, net of charges, then your fund will be eroding. A final factor that contributed to the reduction in your maximum allowable income is the fall in the GAD (government actuary department) rates that are used to calculate your income at each review date. GAD rates are determined by your sex, age, gilt yields and mortality rates. UK gilt yields have fallen to historic lows, which is in part due to the government buying its own bonds as part of the ongoing quantitative easing programme. Mortality rates have also declined as people are, on average, living longer and longer each year. All of the above factors will have had an influence on the revised income you can draw from the plan. There are however, other options available to you. Instead of continuing to draw an income from your drawdown plan, you could use your drawdown fund to purchase an annuity. This would provide a guaranteed income for your lifetime. However, the income you would be offered is largely determined by annuity rates, which have also fallen in recent years. An annuity is a one-off purchase and cannot be undone once the commitment has been made. Annuity rates could be higher in the future, but could also be lower. Another option is flexible drawdown, which would allow you to draw down up to your entire fund in one lump sum if you can meet the minimum income requirement of £20,000 a year (from state pension, final salary pension and any annuity income you may receive). Assuming you have already taken the full tax-free cash from your plan, this lump sum would be subject to income tax at your highest marginal rate. This was recently introduced by government legislation, but you will have to check to see if you qualify and if your current provider offers this facility. In summary, it is worth taking this opportunity to review your drawdown plan to assess income sustainability, investment performance and the ongoing importance of this income. Jason Hemmings is a partner at Cornerstone Asset Management LLP. If you have a question you need answered, write to Jeff Salway c/o The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or e-mail: scotsmancash@yahoo.co.uk. The Scotsman Publications Ltd and Cornerstone Asset Management LLP accept no liability on the basis of this article.