Should clients that are already taking maximum drawdown have their rate of drawdown automatically increased to 120% of GAD at their next review date? Standard Life’s Alastair Black and Scottish Life’s Fiona Tait explain their opposing views below.
There’s no debate about it. The return to the 120 per cent drawdown income limit that applied before April 2011 is good news. It is good for drawdown users, it is good for their advisers and it is good for the economy.
Drawdown users will have more choice, control and flexibility over their income. And it gives advisers welcome extra room for manoeuvre to manage their clients’ income needs and tax affairs for maximum efficiency.
Combined with the commitment to review GAD drawdown rates to get them back on track with market annuity rates, this goes a long way towards restoring the pension drawdown covenant.
If there’s any disagreement within the pensions community over this welcome change, it’s about how to manage the transition back up to 120 per cent for individual drawdown users.
This is where advice and service is key.
Standard Life firmly believes that on-going professional support lies at the heart of any successful pension drawdown strategy.
Drawdown can be complicated, with varying client aims and needs, and the financial adviser is best placed to look after their clients’ interests. So we’ve engaged with advisers since these changes were first mooted, keeping them in the loop and informed about our plans as Government drawdown policy evolves.
We were ready to implement the return to 120 per cent on day one. And we are now writing to the first customers affected to tell them what the changes mean for them. At the heart of our message is a call to action to think about their income needs and speak to their financial adviser.
But we have to follow customers’ income payment instructions.
This means that, where customers have told us to pay a percentage of the maximum income allowed, they will automatically get a higher income when the limit goes up from the start of their next income year.
This is the same approach we take for any income recalculation for these customers. For those that have told us they want a percentage of the maximum – more than 95 per cent have told us to pay the maximum possible. And the vast majority of these instructions were given before April 2011, when the maximum allowed was 120 per cent.
It would be remiss not to follow existing instructions.
Similarly, where customers have told us to pay a fixed amount of income, we will follow this instruction – so their income payments won’t change.
But we are fully engaging customers and their advisers on this.
We will give them a month’s warning of the change. With encouragement to the customer to speak to their adviser. And clear guidance on how to update their income instruction if they want to.
Our drawdown customers can increase, decrease, stop or start their income at any time, free of charge.
By keeping customers informed and working in partnership with advisers in this way, we are confident our drawdown customers will gain the intended benefit of the Government’s limit changes.
Alastair Black is head of income solutions at Standard Life
The new 120 per cent limit will be applicable from outset for all new drawdown plans set up after 26 March. For existing clients already in drawdown the situation is a little more complicated. The new limit is not applicable immediately but will come into effect at the end of the current pension year, which in most cases will coincide with the annual renewal.
Scottish Life includes notification of the new limit within the pre-review documentation we send to the policyholder’s adviser six weeks prior to the pension year end. We do not assume that the client wishes to take advantage of the higher income limit. If they wish to do so, we ask them to tell us using the normal change of income form. This applies even if they are currently taking maximum income. We do not think that it is our decision to make.
Scottish Life believes that while it is good that clients can withdraw higher income, this does not mean that they always should.
Even without the change to the income limit, clients should regularly assess the amount of income their retirement fund can sustain until they decide to take an annuity. Taking too much income from a drawdown plan could have a greater adverse affect on the eventual annuity purchase than poor annuity rates or poor investment returns.
Of course there are circumstances where the client may not need sustainable income. But this is a judgement that can only be made by them, normally in conjunction with their financial adviser.
In practice, there is very little about income drawdown that should be done without financial advice. It is one thing to preserve the status quo, for example, by regular portfolio rebalancing, but quite another to action a change without specific instructions.
Where we differ from some other providers, including Standard Life, is that we believe that in the client’s eyes the status quo is the current monetary amount of income being withdrawn, even if it was originally calculated as a percentage of the maximum amount available.
There is another factor. The income increase to 120 per cent applies to the existing GAD limit; this will not be recalculated unless a quinquennial review is due. (The change from quinquennial to triennial reviews took place in 2011, therefore any drawdown plans operating under a triennial review period will not be due for a GAD review.)
However, the client could request an ad hoc review. This would give some clients, primarily women or those who have experienced strong investment returns, an even higher income limit.
Subject to all the above caveats regarding sustainability, giving the client the maximum flexibility and choice is surely a good tactic. Requiring the client to take action to change their income level makes it more likely the client or their adviser will identify this opportunity and act on it.
Fiona Tait is business development manager at Scottish Life