Five years on from A-Day and it is all change for income-drawdown investors. For the thousands of clients whose fifth anniversary review comes within the next 12 months, the discussion on how to take their retirement investment strategy forward will be very different to the one they had in 2006.
With Sipp, Ssas and Qrops providers all vying for the attentions of IFAs, the benefits and shortcomings of the diverse product offerings on the market are under fresh scrutiny.
There are both negative and positive changes for Sipp investors but the product looks set to dominate. Many draw-down investors will come up for review this year as the new rules take place and for many the future could come as a shock.
With maximum drawdown reduced from 120 per cent of GAD rates to 100 per cent and GAD rates themselves reduced, some investors will see their income fall by a quarter. Factor in negative returns and the effect of withdrawals and incomes could fall substantially. But then what product line is immune from the downturn? Annuity rates do not look much better, with interest rates at historic lows and the outlawing of gender underwriting and Solvency II adding further long-term pressure.
But there will be positives – and not just for those wealthy enough to take advantage of flexible drawdown. One change is likely to be a move away from stripping out as much as possible from funds through drawing down the maximum each year to reduce potential exposure to death duties.
Now the top end 82 per cent charge has gone, a pension is a much nicer place for your money. Pull it out and, under the new rules, you are potentially taxed three times – at your marginal rate on the way out, on the return the assets bring once you have withdrawn them and potentially through inheritance tax. And that logic applies for flexible and capped drawdown. With tax-free wrappers so scarce, where will the money go?
That is good news for clients who find they are not as rich in retirement as they thought. Now they can leave their money in their Sipp and use it if they need to, confident the death benefits are not too punitive.
Sipp providers will also say they have caught up with Ssas in terms of estate planning, although if an Ssas can apportion investment return to other family members in the scheme, that surely remains an attractive option for family businesses.
Sipp providers will be pleased Ssas and family Sipp operators cannot use scheme pensions to help investors get to the £20,000 minimum income requirement, as some had hoped before the Government published draft rules that will outlaw it. But Ssas providers can still boast greater income levels where an individual’s personal health and life expectancy merit it.
Other recent Government changes bolster UK Sipps. The removal of the 82 per cent tax rate on alternatively secured pensions removes one of the key motivators for UK residents to take their money offshore. Figures obtained from the Treasury by AJ Bell last year found almost £500m of assets from UK Sipps had been transferred to Qrops arrangements in the first two years after A-Day. Now the Treasury is effectively outlawing the receipt of income from Qrops plans where the individual is UK-resident.
Clients may not now be able to get their hands on as much income before age 75 but it is hard to argue the new regime has not removed perverse incentives from the system.
John Greenwood is editor of Corporate Adviser