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Andrew Roberts: Fourth time lucky on drawdown reform?

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Last week’s Budget saw the Government respond to calls for a more open drawdown regime and it has gone much further than people expected by allowing unlimited access on the grounds that state pension provision should provide a sufficient living wage in retirement.

Let us hope this change is here for the long term. Over five years, the Government will have altered drawdown four times, which is quite a record.

Freeing up people’s drawdown pots will bring down costs and allow more holistic planning in retirement, which should be good news for pension savers. It will also deal with the discrepancy whereby middle-ground savers are locked in yet low or high savers have been able to freely access their pensions via trivial commutation or flexible drawdown respectively.

If uncapped drawdown is being brought in, let us simplify things by getting rid of the farcical second lifetime allowance test at age 75. This is complex to explain and everyone can avoid it by drawing any excess growth prior to age 75 anyway. Hopefully the Finance Bill will deal with some of this detail.

We have clients who are earning more in interest, perhaps from property rents, than they are allowed to draw under their capped drawdown plan. They will be very happy being able to draw as much as they want.

It will also address those in ill health who could draw more under an enhanced annuity than under normal drawdown and will mean that a scheme pension under SSASs and Sipps is no longer needed as a route to drawing a higher pension.

Those drawing a scheme pension from an SSAS or Sipp (rather than using drawdown) should lobby to be able to transfer into this new version of drawdown.

There has been confusion about increasing the capped rate while at the same time introducing flexible drawdown for everyone. This is because the rules are being relaxed temporarily until 6 April 2015 when the uncapped drawdown rules are introduced. Until then – from 27 March 2014 – maximum drawdown rates will increase to 150 per cent of annuity rates and flexible drawdown will be available for those with secure pension income of just £12,000.

This interim step seems a little unnecessary. Other than placating pensioners a year earlier, it seems to add extra complication for little gain. Providers will have to update documentation that they know will have a limited shelf life and issue revised drawdown certificates while advisers may have to revisit drawdown advice for one year only.

Finally, hidden away in the Budget is the increase in minimum pension age from 55 to 57 from 2028 with minimum pension age being linked to state pension age going forward.

There have been calls for earlier access to pensions to help stem the flow of those wanting to liberate their pensions. This goes against those calls but the change is a long way hence.

In the meantime, those desperate for extra money will be able to draw extra legitimately from their pension scheme once they reach age 55 (or earlier on ill health).

I wonder if there will be a flow of ill-health requests as a means of liberating pensions?

Andrew Roberts is a partner at Barnett Waddingham

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