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John Lawson: GAD review should provide drawdown boost

John Lawson
John Lawson

A relatively quiet Budget for pensions was headlined by two main measures: a new objective for The Pensions Regulator to support sustainable growth when dealing with employers and their DB deficits and, a review of the maximum drawdown limit.

The detail of TPR’s objective has yet to be spelled out but given it is to be “fully consistent with the 2004 funding legislation”, the answer looks like longer deficit correction periods.

While this may please sponsoring employers, trustees of schemes with large deficits will now be wondering how and when any black hole in scheme finances will be repaired.

On maximum drawdown, the Government has commissioned the Government Actuary’s Department to review drawdown tables, to ensure they still reflect the annuity market. Maximum drawdown yields are now based on 15-year gilt yields, whereas annuities tend to back their income streams with a mix of long gilt and investment-grade corporate bonds.

Moving to long-dated gilts alone has the potential to add 10 per cent to the maximum drawdown rate while adding long-dated investment-grade corporate bonds could lead to another 5-10 per cent uplift. As widely trailed, the single state pension of £144 a week will be brought in a year early in 2016.

This is good news. With automatic enrolment kicking off, we need to be able to send simple messages to savers. The complex mix of basic state pension, state second pension and pension credit is not well understood by the majority of pensions professionals, let alone the public.

The state pension age will have to rise in line with rising longevity to remain affordable meaning those starting work today will probably be picking up their new state pension at 75.

As announced in the autumn statement, the lifetime allowance will fall to £1.25m in 2014 with two methods of protecting the value of high earners’ pensions: fixed protection 2014 and an individual protection.

The former will work just like fixed protection 2012 but in this case a lifetime allowance of £1.5m will be claimed, given that no new pension accrual will take place after 5 April 2014.

Full details of individual protection will be consulted upon, but this will be open to those with pensions worth £1.25m or more. Unlike fixed protection, this will allow continued accrual with lifetime allowances charges payable only on benefits in excess of £1.5m.

Perhaps the biggest impact for advisers is a creeping change not officially announced.

Over the last few years, a higher personal allowance has been achieved by reducing the point at which higher rate tax is paid. This could push the number of higher and additional rate taxpayers above 5 million by 2014, from just over 3 million in 2010.

Similarly the £100,000 limit, at which personal allowance is lost, remains unindexed and subject to fiscal creep.

Those forced into higher rate tax by reduction of the threshold may seek to use pensions to reclaim some tax. Likewise those who lose personal allowance. This growing band of customers with tax problems should be grist to the mill for advisers.

John Lawson is head of policy, corporate benefits, at Aviva


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