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Flexible features

LV= head of pensions Ray Chinn looks at the innovation behind flexible drawdown and asks if the coalition can transfer this into legislation

Chinn: ‘The secured element of the fund will need to meet a minimum income requirement,
Chinn: ‘The secured element of the fund will need to meet a minimum income requirement, which could be a complex calculation’

Advisers using income drawdown have experienced a bit of a rollercoaster since the concept was first launched in 1995.

Markets have provided some interesting times in terms of the impact they have had on drawdown funds over the 15 years since launch – further ups and downs for drawdown customers. Annuity rates have also remained relatively low during the period, meaning challenges on achieving a critical yield where a specific level of income is required at age 75.

Other rule changes, primarily around A-Day, caused a further review of drawdown strategies and the promise of being able to run drawdown beyond age 75 – in the form of alternatively secured pensions – turned out to be a bit of a damp squib once the potential tax rates on death became clear.

Hardly surprising then that the market for income drawdown has reached a plateau over the past few years. There was a slight boost as those likely to be caught by the revised minimum normal pension age change from 50 to 55 moved into drawdown during Q4 2009 and Q1 2010 but generally the demand for Chinn: ’The secured element of the fund will need to meet a minimum income require-ment, which could be a com-plex calculation’

drawdown has been flat in recent years. Against this background, the consultation paper issued by HM Treasury this summer around removing the requirement to annuitise by age 75 came as a pleasant surprise.

First, this was not an area expected to appear so high on the coalition agenda and, second, it demonstrated a genuine desire to look at the age 75 issue. But perhaps the most surprising element was the appetite for genuine innovation through the introduction of a “flexible” drawdown product (with the existing drawdown-style product becoming known as “capped” drawdown – reflecting the fact that there are limits on income).

The concept is fairly simple. If an individual can demonstrate that they have secured an income that will avoid them having to fall back on state provision in future years, then they can opt for flexible income. This will give them more freedom about how they use their funds through retirement.

However, this is not going to be as straightforward as an examination of the details proves. The secured element of the fund will need to meet a minimum income requirement, which could be a complex calculation, taking into account a variety of benefits, including state pensions and means tested benefits.

In addition, the income will need to be secured through purchase of an annuity of a particular shape, restricting choice and hardly pleasing those who were not keen on annuity purchase in the first place. Based on some calculations LV= have done, this could require a fund of around £250,000 or more – so out of reach many who have much smaller pension pots.

Then there is the challenge of policing this to ensure that those who can benefit from flexible drawdown have the right “security” in place.

We are expecting further details about the planned changes in early December so will have to wait to see how much desire to innovate is translated into legislation.

There have been comments around the tight timescales involved to introduce changes by April 2011 (particularly flexible drawdown).

So, a balance is probably needed and flexible drawdown might be a future development – but at least the consultation shows a commitment to work with the industry and build a more flexible framework to support different needs throughout retirement.

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