Run out of scheme
Barely six months after the introduction of new retirement income rules, it is all change again. In April, we got new rules on calculating drawdown income. The triple whammy of reducing the maximum limit from 120 per cent to 100 per cent, introducing new tables incorporating improved longevity and the severe current market conditions, which have seen gilt yields and fund values plummet, mean drawdown incomes have fallen dramatically on review.
No wonder more people have been turning to scheme pensions as an alternative. These have been aimed firmly at highnet-worth clients with significant pension benefits and potentially allow a higher income to be paid than drawdown as the actuary can decide the income taking into account the person’s individual circumstances.
They have proved popular. But the Government has now tabled an amendment to the Pensions Bill to effectively pull the plug on this option by reclassifying it as a defined-benefit arrangement with all the additional costs that will incur, probably putting the expense beyond the reach of all but the very richest SSAS and Sipp customers.
This piecemeal approach to legislation is annoying. The rules and options for pension income are confusing enough without tinkering every five minutes. In one way, it shows it is as difficult for the Treasury as the rest of us to completely envisage the fall-out from legislation change. With hindsight, it is obvious that if you cut drawdown income so dramatically, then the scheme pension market will take off. I suppose the part the Treasury could not forecast with certainty was the dramatic tumble gilt yields and fund values would take.
The changes to drawdown were made because of the real and present danger of people running out of money. Actuaries calculate a level of scheme pension to be paid assuming that they will last exactly a lifetime and the fund will run out on the day the person dies. If the fund takes a hit because of poor markets, there is no guarantee behind them, no back-up of an annuity. Hence, the Treasury is getting nervy about people falling back on the state.
The change will also prevent large defined-contribution schemes from paying out pensions from scheme funds. Instead, all will have to be secured with an annuity provider.
It is incredibly frustrating for those who have already bought a scheme pension. Instead of a retrospective change to become defined benefit, it would be fairer to let those already set up continue as they are. For those who have yet to secure an income, it is worth remembering conventional annuity and drawdown are not the only options. There are more flexible products emerging which may offer better income options than either of these.