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A J Bell proposes radical pensions drawdown overhaul

A J Bell has proposed a radical overhaul of the capped drawdown pensions regime due to concern about the impact low gilt yields are having on peoples’ maximum income.

The provider has persistently raised concerns about the way maximum income for capped drawdown is calculated. Currently, people are allowed to take 100 per cent of the equivalent GAD annuity rate.

This method is largely based on 15 year gilt yields, which have fallen substantially in recent years. Currently, 15 year gilt yields stand at 2.25 per cent.

A J Bell chief executive Andy Bell (pictured) says the Government should introduce a new regime based on the size of an individual’s fund and their age.

Under Bell’s proposals, maximum drawdown income for someone with a pension worth less than £200,000 would increase as they got older. So, someone who was aged 55-59 would be able to take up to 5 per cent of their fund each year, while someone aged 60-69 would be able to take 6 per cent.

The drawdown cap would continue to increase up to 9 per cent for someone who is aged 90+.

Anyone with a pension pot worth more than £200,000 would be able to draw an annual income of 10 per cent of the excess from their fund in addition to their ‘basic’ drawdown allowance.

They would move to their basic drawdown rules once the value of their pot fell below £200,000.

Bell says policymakers should consider scrapping flexible drawdown altogether as part of his proposed reforms.

He says: “This blueprint is based on the simple premise that there is an increased risk of individuals falling back on state benefits if they hold pensions valued below a certain figure.

“These rules could operate in tandem with flexible drawdown, although there would be merit in scrapping the flexible drawdown rules entirely given that uptake has been so low.

“Politically, this would lead to enhanced tax revenues and increased spending. Pension savers want to draw more taxable income than they can at the moment and it normally only makes sense to draw down on pension savings if they are to be spent.”

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Comments

There are 8 comments at the moment, we would love to hear your opinion too.

  1. A sensible suggestion.
    Hopefully the dripping tap if this shambles and its impact on voters, and the economy, will eventually lead the Government to see the current format is broken, and that the recent 20% Max GAD cut made things worse (when financial markets and gilt rates had already had an impact on many).
    The way to get it to actually progress is to make politicians realise the public will vote for a party who implement a sensible solution. Otherwise the Government will defer it to the back-burner.

  2. These sound like eminently sensible suggestions from experts in the field who have considerable experience in administrating drawdown plans and contact with clients (consumers) who use them. The trouble is that those who make the decisions do not fall into any of the above categories.

  3. In the main a sensible alternative to the current capped drawdown rules. I do not however see the point of removing the Flexible drawdown option as whilst the take up has been low to date it will pick up as more pensioners reach the older age groups (70+). Whilst they may not be opting for flexible now they may well have incorporated it in their long term plans (Paying for care fees for example) and once again another change just means additional planning required and further cost. Wouldn’t it be nice just to have some consistency which supports long term planning for once!

  4. I like the 401K regime (USA) on this. Basically, if your life expectancy is n years, you can draw out up to 1/nth of your fund in that year.

  5. ken170647 youtube 22nd October 2012 at 4:58 pm

    The whole concept of people saving up and then not being allowed to get at their money is immoral. “Theft” is another word that springs to mind.

  6. The 401K system cited by Norm d’Plume sounds very similar to my proposal for a Retirement Income Bond, under which the permitted level of income would be entirely unrelated to annuity rates.

    Instead, the level of income would be geared to deplete (utilise) the fund fully over the underwritten remaining lifetime of the Bond holder, allowing for an estimated growth rate of, say, 5% p.a. with an insurance element against early fund burn-out and NO tax charge on death against any unspent funds. Who could (reasonably) complain about lack of value for money (the biggest complaint currently against annuities) from such a product?

    For Steve Webb to ignore such a proposal only goes to show his total lack of independence from his masters at the Treasury. He’s just a puppet whose strings are being pulled from behind the scenes and for people like that I cannot find polite words to express my utter contempt.

  7. I agree with Ken 170647 ( 22 October ) — the whole concept of people saving and then substantially ” freezing ” their assets is “immoral” and “theft” .

    Common sense is that people should have more control over their own money .

    Perhaps the reconstituted model should be based on the USA 401/K where apparently no restriction on what you can withdraw once you reach a certain age ( 60 yrs USA ? ) subject to paying income tax on withdrawals — maybe say 65 or 70 yrs here ? That would put on fairer footing with assets in ISAs and allow financial/estate planning of currently ” captive ” assets , currently subject to 55% charge on death — no good reason for higher rates than applicable Inheritance Tax rates on non-captive assets .

    Sorry but Mr Bell’s and Ms Altmann’s respective proposals just rehash of the capped drawdown pension concept and not really ” radical” as suggested .

    The Government/Treasury/HMRC should be bolder than Mr Bell and Ms Altmann and unfreeze captive assets from capped drawdown pensions after a certain age , perhaps 65 or 70 , similar to USA 401/K.

    But would the Pensions/Financial Services Industry allow this ?

    I wonder whose vested interests are greater , those of the Government etc or those of the
    Pensions/Financial Services Industry ?

    N.O Rob Erie

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