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ABI to propose radical pensions drawdown solution

Treasury 480

The Association of British Insurers is set to propose drawdown reforms to alleviate the cuts in income savers are facing, which will shortly be presented to Government.

Capped drawdown was introduced as part of the Government’s reforms to abolish compulsory annuitisation at age 75.

Following the changes, which came into force in April last year, the maximum amount a person in capped drawdown can take as income was reduced from 120 per cent of the equivalent GAD annuity rate to 100 per cent. This, coupled with plummeting gilt yields, has dramatically reduced the income that savers are able to take each year.

Money Marketing understands the trade body has agreed a short-term solution with members which it will present to Government officials in the coming weeks.

The solution would see the GAD maximum calculated using a mixture of long-term corporate bond yields and long-term gilt yields, rather than the 15-year gilt yield currently used.

Insurers say this would better reflect the price of a single-life annuity on the open market and would increase the maximum income available to savers.

A source says: “Using a mixture of long-dated gilts and corporate bonds to calculate GAD will take some of the short-term pain away. Over the long-term we need something that is not as arbitrary as taking a fixed percentage of GAD rates.”

The ABI believes the reform would not require any change to primary legislation. Instead, the Government would amend its GAD calculation guidelines.

Legal & General pensions strategy director Adrian Boulding says calculating GAD using just corporate bonds would increase drawdown incomes by 12 per cent, while a 50/50 split between gilts and corporate bonds would boost incomes by 6 per cent.

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