George Osborne is under increasing pressure to review the formula used to calculate the maximum income investors can take under capped drawdown ahead of the Chancellor’s autumn statement next week.
Savers in drawdown have seen their retirement incomes fall in recent months as gilt yields, which are used to calculate the maximum annual income people can take under capped drawdown, have plummeted to a record low of 2.5 per cent.
This follows the Government’s decision to reduce the annual income limit for capped drawdown from 120 per cent of GAD to 100 per cent.
A J Bell marketing director Billy Mackay says: “We would like the Government’s autumn statement to acknowledge it went too far in attempting to reduce the risk element of drawdown.
“The Government is concerned that individuals could use drawdown to deplete their fund too quickly. The income review system is the mechanism which stops prolonged excessive fund depletion. Making the income review mechanism three yearly will provide all the downside protection that is required.
“Reducing the GAD tables and removing the 20 per cent uplift at a time coinciding with record low gilt yields has proved disastrous to the income planning for investors in drawdown and needs immediate action.”
Standard Life head of pensions policy John Lawson says policymakers should look to smooth fluctuations in GAD rates by linking them to a smoothed average of gilt yields.
He says: “It would be difficult for the Government to remove the link between GAD rates and gilts altogether because it is not clear what you would replace that with.
“I would like the Government to look at the average gilt yield over the last two years, which would smooth out the peaks and the troughs. At the moment it is jumping all over the place.
“We need a sensible calculation to cope with periods like this. It would be madness to continue as we are because at the moment people are facing a retirement lottery.”
Hargreaves Lansdown head of pensions research Tom McPhail says: “I do not think the Government should change anything about the capped drawdown regime.
“All it would be doing is finding more ways for people to deplete their pension fund further.”