The Treasury is under pressure to rethink the way it calculates capped drawdown limits as savers face a drop in their retirement income of 26 per cent from last year.
Under reforms to the pension drawdown regime which came into effect in April, the maximum retirement income a person can take was reduced from 120 per cent of the equivalent Government Actuary’s Department annuity rate to 100 per cent of GAD.
Six months after the new GAD rules were introduced, the 15-year gilt yield used to calculate income drawdown limits slumped to an all-time low of 2.84 per cent.
Last week, AJ Bell chief executive Andy Bell wrote to Treasury financial secretary Mark Hoban calling on the Government to “immediately re-instate” the 120 per cent GAD limit. He also urged policymakers to undertake a review to determine whether “slavishly following gilt yields and actuarial principles” remains the most appropriate way to set drawdown limits.
He said: “The Government introduced drawdown to provide individuals with flexibility but introduced annual income limits and regular income reviews to prevent inappropriate fund depletion.
“I would respectfully suggest that the recent changes to income limits have tipped the balance too far in favour of downside protection.”
Alliance Trust head of pensions Steve Latto says a 65-year-old male with a drawdown pension fund of £100,000 in September 2010 would have been able to take a maximum pension income of £7,800.
This month, the same person would only be able to draw up to £6,100 and Latto expects this figure to fall to £5,800 in October.
He says: “Income drawdown rates are at an all-time low. Advisers need to make sure they warn their clients about how their pension income will be affected before any change takes place. Leaving it until after the change has taken place is too late.”
Industry experts say Treasury officials are unlikely to budge on either the GAD rate or the use of gilts to determine the limit for capped drawdown.
Last month, Partnership warned there was a significant risk that a large number of people in capped drawdown will exhaust their pension funds prematurely under the current rules. The GAD rate was introduced specifically to address this risk.
Chief executive Steve Groves said if this happened, people who thought that taking the maximum income was safe could challenge the advice they were given at the time.
Hargreaves Lansdown head of pensions research Tom McPhail says: “Increasing GAD rates because gilts are low seems to me a bit like the Greeks saying, we are running out of money, can you lend us some more please?”
“The point of using gilt yields is that it is a decent proxy for annuity rates and they are low at the moment because the market is extremely nervous about equity risk.
“The GAD limit is saying to investors go into equities through drawdown if you want to, but do not overcook the income withdrawals because there are some very significant market risks out there.”