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Drawdown strain

Treasury proposals for reforming pensions tax relief provided some welcome relief to the pension industry. Not only were the proposals less penal than some had feared, importantly, they also show that the Government had listened to at least some of the industry’s concerns.

These proposals are only part of the pension jigsaw – another important piece is the proposals to remove the requirement to annuitise from age 75. The consultation period on these proposals closed on September 10 but it remains unclear when we will discover the Government’s plans and timescales. All they have said is that they plan to publish draft legislation in the autumn – although they have acknowledged that clarity over the future framework is needed as soon as possible.

I believe the industry faces an enormous challenge to introduce the new regime, including capped and flexible drawdown, if it goes ahead as proposed. In their impact assessment, the Treasury estimated that around 8,000 individuals a year would look to satisfy the minimum income requirement for flexible drawdown. I believe this is underestimated. We have just completed a round of seminars with advisers and over 90 per cent of those attending said they had clients who would use flexible drawdown.

From ABI statistics and my knowledge of the Sipp market, the number of new income drawdown cases this year is likely to exceed 40,000 and I would expect a significant proportion of these to be potential users of flexible drawdown. In addition, I reckon there are over 300,000 current users of drawdown and the take-up of flexible drawdown from this group could easily exceed 50,000.

These sorts of numbers will put an incredible strain on the industry. Some simple transitional arrangements are going to be key but even with these we are going to have to cope with new projection regimes, the administration of a minimum income requirement, potential changes to the current drawdown regime and a likely change to the tax rates on death. Alternatively secured pension will disappear and current users of this – albeit small in number – will have to be accommodated.
The demands on advisers too will be enormous – at a time when they are grappling with a host of other issues. There is a possibility that the Government could delay the introduction of these changes until 2012 – the transitional arrangements introduced earlier this year allowing an extension of the current regime to age 77 might just provide a get out of jail card.

Otherwise, we must hope for an early and short autumn this year. With every week that passes the capacity of the industry- particularly those providers with large legacy books – to cope with the introduction of these changes in April next year looks to be less likely. I fear that we could have some serious administrative breakdowns and disruption unless the new regime is simpler than proposed or is deferred. Providers and advisers should be preparing for a hectic start to 2011.

John Moret
Director of marketing Suffolk Life

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