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8 May 2015 last updated

Flexi-access drawdown benefits as US and UK markets rise

People retiring and opting for flexi-access drawdown have benefited from recent rises in equity markets as the Federal Reserve delays an interest rate rise and the UK general election avoided the uncertainty of a hung parliament.

From 6 April 2015 there is no need to buy an annuity and of the 400,000 people retiring each year the HMRC expects 130,000 people to select flexi-access drawdown rather than pension annuity.

Flexi-access drawdown allows you to take a 25% tax free lump sum with the balance remaining in a fund which can be accessed at any time.

The new pension rules would allow you to take the whole fund as a single payment although tax would be paid at your marginal rate.

In most cases people would spread this over a number of years or use flexi-access drawdown to take an income for their lifetime. The fund would be invested in equities and any improvement in markets would help to increase the fund value.

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Markets higher as uncertainty is removed

The equity markets in the US and UK have gained as uncertainty is removed about the future, adding £50 billion to british businesses. In particular, businesses that would have been hit by Labour policies such as banks, transport companies, energy suppliers threatened with caps on charges as well as house builders and estate agents threatened with rent controls and manson taxes.

In the UK the general election with the unexpected victory for the Conservatives avoiding the uncertainty of a hung parliament was welcomed by investors increasing the FTSE-100 index by 159 points or 2.3% to 7,046. The FTSE-250 index increased to a record high climbing 487 or 2.8% to end at 17,935 recording the best day for three and a half years.

Wall street was also higher with the Dow Jones increasing 267 points or 1.5% to end at 18,191 as investors are confident the Federal Reserve will not increase interest rates until later this year.

This follows poor manufacturing data with lower wage packets across the US and growth at only 0.8%. Unemployment in the US has dropped to a seven year low of 5.4% but the economy remains weak forcing the Fed to delay an interest rate hike until December analyst believe.

Drawdown funds gain in value

For people with a flexi-access drawdown fund of £100,000 with an investment tracking the FTSE-100 index the market rise would increase this to £102,300. The gain could be left to grow, taken as a single lump sum payment or income. Most people at retirement are risk adverse and tracking an index would be a higher risk and volatile.

As an alternative a smoothed growth fund could offer a gain after charges of 5.95% per year which is added the the fund on a daily basis providing a very low level of volatility. For this type of fund gains in equity markets increase the likelihood of future income remaining unchanged or possibly increasing over time.

In contrast annuity rates have suffered as as the 15-year gilt yields reduced by 7 basis points as investors expect the Bank of England to delay raising interest rates. As a general rule a fall of this size would result in annuities reducing by 0.7% at some point in the future.

News related stories:
Flexi-access drawdown will be used by 130,000 people says HMRC
Drawdown to benefit as the government scraps 55% pension death tax
Radical changes to annuities announced in Chancellor's Budget
Related internet links:
Guardian - FTSE 100 index surges after shock election result
Telegraph - Wall Street soars on hopes Fed delays rate rise
BBC - Shares surge on Election outcome
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