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Claire Trott: When drawdown rates don’t work out

Are falling GAD rates forcing people out of capped drawdown?

Technical Connection head of pensions strategy Claire Trott

When the pension freedoms came into force, the days of capped drawdown were numbered.

I felt it should have remained as an option for those that wanted some control over the amount they could withdraw each year and those that did should have been able to avoid the money purchase annual allowance.

That, however, was not to be but we still have significant numbers of people in capped drawdown.

The maximum income is still reviewed triennially or on the anniversary if requested based on Government Actuary’s Department rates, but these have been at the minimum level or floor of 2 per cent consistently since February 2016 and for six months on and off in 2015 as well.

System updates

In January HMRC published, without warning, new extended tables which could cater for GAD rates below 2 per cent. However, it was unclear at what point they would need to be used, which caused a lot of confusion. A few days after the tables were published, it was announced that these should be used from 6 April.

This raised even more questions, given the GAD rates change on the first of the month, so could cause issues for providers and therefore advisers and clients too.

Shortly after this announcement, HMRC was convinced to delay the change and bring them into use on 1 July, which would help providers update their systems. This meant there was six months to deal with any issues resulting from the fact that for those with upcoming reviews, their maximum income was likely to drop.

An alternative approach to GAD tables

The minimum level of GAD rates gave some consistency and confidence because they could at least calculate how much the minimum income might drop. In many cases this drop was not as much as many had seen in the past and if their fund had grown sufficiently they may have only seen a minimal drop or none at all.

With the removal of the minimum, the drop would now clearly be more. On 1 July, 2014, the rates were 3 per cent and were down to 1.5 per cent by 1 July 2017. This may sound a lot but the drawdown client will be three years older which increases the amount they can take each year.

For example, aged 65 on 1 July, 2014 with a fund of £100,000, the maximum income would have been £8,850; aged 68 on 1 July, 2017 with the same fund of £100,000, the maximum would only have dropped to £8,250.

Fighting for flexibility

This drop may not seem very significant, but if the fund value has also been depleted as a result of poor investment performance, it would be worse. This is also only a small to moderate-size fund, so the drop may seem more significant to those with larger funds.

For those impacted in the immediate future, the relative short notice of the change meant that it was not possible to end a reference period between the announcement and the 1 July, because the reference period must always end at the end of a pension year. This may be OK for those whose pension year ended in the last six months, but they are also then taking the risk on what may happen in the next year.

None of this is a concern for those in flexi-access drawdown and it is relatively easy to move from capped to flexi-access. In most cases it will be a form or two that needs completing. The implications may, however, be more significant.

Firstly, you have the money purchase annual allowance, which currently reduces the annual allowance the client has to £10,000, although we still expect this to drop to £4,000 this tax year. For those that have been regularly accessing their income, this is not really likely to be too much of an issue because if they are drawdown a regular income they probably are not funding a pension as well.

However, a move to flexi-access drawdown removed the clearly defined maximum income which helps advisers and clients plan the longevity of their funds. So giving a client unlimited access to pension funds might not be a risk advisers want to expose their clients too. The flexi-access drawdown regime is so tempting for many, who could access extra income without consulting their adviser, ruining pension and tax planning that the adviser had put in place.

There will be clients for whom the move to flexi-access drawdown is a good thing, possibly saving charges in the long run by avoiding the triennial reviews and drawing a sensible level of income, even if it is about the maximum GAD figure they would have been able to access in capped drawdown. But some may feel forced to move just to access enough income to meet their needs, but opening up the temptation to access more.

Claire Trott is head of pensions strategy at Technical Connection

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Comments

There is one comment at the moment, we would love to hear your opinion too.

  1. Terry Mullender 11th July 2017 at 3:54 pm

    I get the impression that Claire is not a particular fan of flexi access income drawdown, and perhaps she is also in favour of returning to the days of client’s having to purchase a conventional annuity with their pension fund no later than age 75.

    Thankfully things have moved on, and clients are now “trusted” to be sensible with what is after all their own money.

    With the help and advice of their financial adviser lets give clients the benefit of the doubt and treat them like adults!

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