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Mike Morrison: For GAD’s sake

Drawdown clients are facing problems as rates tumble.

I have recently been travelling round the country meeting with groups of advisers. I find some of the most fruitful meetings with advisers are the ones with no set agenda where we have an open discussion on topics of interest in pensions and retirement planning.

In some of these meetings, the first question has been about retirement income and what I think about the possibilities of future reform for the income-drawdown market. The reason for the interest is clear – quantitative easing and other macro-economic pressures have resulted in falling gilt yields. The continued downward pressure on annuity rates and gilt yields for the calculation of drawdown income has meant the amount of income available to those approaching, or already at, retirement has been affected. At the time of writing, the gilt yield for drawdown is 2.25 per cent, the lowest level so far and only 0.25 per cent above the floor of 2 per cent set by HMRC.

In addition to falling gilt rates, often flat (at best) investment performance and the removal of the 20 per cent uplift when the new GAD rates were introduced, all mean a lot of people are facing a significant reduction in income.

The generally accepted alternative to drawdown has been an annuity but falling gilt yields have also meant falling annuity rates. Add to this the rarely quantified effects of Solvency II, the vagaries of the Test Achats ruling, the growing take-up of enhanced annuities and the prognosis for annuity rates improving seems poor.

The state of annuity rates means drawdown has probably been used by more people as a direct alternative. The GAD rates for drawdown still rely on an annuity-based benchmark. This was fine when annuity rates were at a higher level and there was some compulsion to buy an annuity but is it now time to move away from this?

It appears the response from the Treasury has been a rejection of any GAD rate review as there is some concern that funds could be depleted too quickly. But if gilt yields had not gone down and we were still at 4.5 per cent (a rough estimate of the average over the last few years), then there would have been no issues.

The call from the International Monetary Fund for more QE and interest rate cuts suggests the figures will continue to fall. For anyone considering drawdown today, I would suggest getting an illustration based on the minimum of 2 per cent and making sure the contract has an annual review facility to capture any short-term rises in GAD rates or fund value.

In the short term, it would do no harm to reinstate the 20 per cent uplift in GAD rates but as part of an overall review of retirement income options, which should include drawdown, annuities and scheme pensions.

Mike Morrison is head of pensions development at Axa Wealth



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  1. Julian Stevens 28th June 2012 at 9:57 am

    “the response from the Treasury has been a rejection of any GAD rate review”. The people who work for the Treasury, of course, enjoy gold plated Rolls Royce fully index-linked and guaranteed final salary pensions and thus have no comprehension of or sympathy for the dire impact that annuity rates are having on everyone else’s retirement incomes.

    And the government wonders why the populace at large is increasingly antipathetic towards saving into any sort of DC pension plan, whilst all that Steve Webb can come up with is a statement that enhanced/impaired life annuities will help ~ which rather crassly overlooks the fact that more people buying impaired life annuities damages the rates available to everyone else.

    The annuity (rate) trap is the biggest elephant in the room, yet the government appears unwilling even to acknowledge its existence, let alone do anything about it. What about a Retirement Income Bond, under which the level of income available would be entirely unconnected to annuity rates, with an insurance element against early fund burn-out? What about issuing tranches of extra high yield gilts available only to annuity funds? Those measures would very probably liberate huge amounts of spendable income into the economy and spending, of course, generates taxes, so it’d hardly be a one way proposition, would it?

    But no, the government refuses to listen and Steve Webb’s hands are tightly tied behind his back. If he had any integrity (assuming he has the intelligence to realise what action actually needs to be taken), he’d speak out and, if necessary, resign as pensions minister on the grounds that the government refuses to allow him to implement the changes so desperately required. Were these reforms enacted, NEST might actually be a good idea. But, as things stand, all it constitutes is forcing people to participate in a manifestly broken retirement savings system which, let it not be forgotten, the Conservative party, in its pre-election manifesto, it promised it would fix if it got elected. Well, it got elected (sort of) and now it’s reneged on that promise. A pox on them all.

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