The critical yield calculation is used to show the investment returns required from a drawdown pension arrangement to match the income that could be provided by a traditional fixed interest annuity

the Regulators have defined two critical yields that can be used in illustrating drawdown pension contracts (known as income drawdown contracts, or pension fund withdrawal, at the time).

• Type A critical yield: this is the growth rate needed on the drawdown investment sufficient to provide, and maintain, an income equal to that obtainable under an equivalent immediate annuity; and
• Type B critical yield: this is the growth rate needed to provide and maintain a selected level of income.

The guidelines state:

• type B illustrations must be accompanied by a type A illustration;
• type A illustrations must show annuity purchase at ages 65, 70 and 75: other ages may also be assumed;
• the regulator prefers type A illustrations to be client-specific, but allows standardised tables to be used; and
• for client-specific illustrations, at least two of the following must be shown:
• the total critical yield;
• the underlying annuity investment return; and
• the additional yield, i.e. the difference between the total critical yield and the underlying annuity investment return.