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Providers split over lack of Treasury action on income drawdown

Providers are split over the Treasury’s decision not to reform income drawdown rules in the Autumn Statement.

Last week, the Treasury said the way income withdrawal rates are formulated will not be changed after it had ordered a review in the March Budget.

The Association of British Insurers had called for the Government Actuary Department maximum used to set drawdown rates to be calculated using a mixture of long-term corporate bond yields and long-term gilt yields. The GAD maximum is currently based on 15-year gilt yields.

The Treasury says the review found withdrawal rates are a “reasonable match” to annuity rates and the way they are formulated does not need to change.

Legal & General pensions strategy director Adrian Boulding says: “The pressure on drawdown will not go away because savers will not be happy if they have a retirement pot that is going up faster than they can draw the money out.

“The matter is not closed and there is still a lot of pressure on decumulation because what we have now is not right. Just because the Treasury has not taken this opportunity does not mean the case is closed.”

But Aviva head of policy John Lawson says: “There is no obvious advantage in adding complexity to the GAD limit by trying to calculate it according to a mix of long corporate and government bond data to mimic annuities.”

Skandia retirement planning manager Adrian Walker says: “I am glad there has been no minor tinkering with the underlying income factor tables as a result of reviewing against the gender neutral annuity market post December 2012.

“This will give a degree of certainty for clients using capped drawdown, given that the next formal GAD review of drawdown will not be due until April 2016.”

In April this year, the Government increased the maximum amount a person in capped drawdown can take as income from 100 per cent to 120 per cent of the equivalent GAD annuity rate. It had initially reduced it from 120 per cent to 100 per cent in April 2011.

The Department of Work and Pensions is setting up a decumulation taskforce in the coming months to look at new ways to take money out of your pension.

Last year, Money Marketing revealed a small FCA thematic review showing two-thirds of clients were not receiving suitable drawdown advice.

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  1. Given that dismally low annuity rates are the single biggest problem with translating pension funds into income, I fail to see how a broad match between GAD and OM annuity rates can be cited as any sort of justification for not reviewing Income DrawDown.

    Income DrawDown itself is in desperate need of overhaul and fundamental restructuring to break the shackle of annuity rates, not to mention removal of the punitive 55% death tax charge on unspent funds. This could be achieved by way of a Retirement Income Bond under which the (maximum) level of income would be geared to full depletion of the fund over the remaining lifetime of the Bond holder, allowing for a sensibly prudent rate of investment growth with a insurance element against early fund burn-out. Any unspent fund on death should be allowed to pass tax free into PP’s for the next generation.

    Whilst this probably wouldn’t increase dramatically the ratio of fund to income, it would surely improve it somewhat and address the common perception that annuities are poor value for money. Poor annuity rates are the principal reason why so many people are reluctant to lock away their money in a pension plan, allied to the constant fear of even the Tax Free Cash allowance being reduced or made subject to tax. Basic rate tax relief offers little in the way of compensation for these factors. If the government wants to “reinvigorate the UK’s savings culture”, it needs to take positive steps to address the widespread lack of public trust and confidence in pension saving. Why isn’t it doing so?

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