The Government has recently completed its consultation into the scrapping of the age 75 annuitisation rules and this has opened an industry debate on how flexible these rules should be.
The proposals make sense in that they are clearly trying to address the issue of how people with modest funds can have more room for manoeuvre.
One suggestion is a cap on the maximum income taken from the pension. There is a real question around this because you have to ask what the maximum income on the capped pension should be.
If it is set too low it is unattractive, too high and people risk running out of money. It is a fine balancing act to get this sort of rule right.
Getting it wrong could create a moral hazard as the limit may be set at a point where the pensionholder could take as much income as they can from their pension pot while investing quite aggressively. If it all goes wrong, they can just fall back on the state.
If the Government were to create such a cap, it would need a mechanism to avoid such a hazard. Such proposals are welcome in that it does offer more flexibility but setting the maximum drawdown limit has to be properly thought out.
Another idea is to offer total flexibility for people over a certain minimum income requirement. This is a bit odd because it does not sit with what the Government and the Revenue have been saying all these years – that a pension is supposed to provide an income in retirement.
The challenge for pensions is in how Middle Britain with modestly sized funds provide themselves with a sustainable income in real terms for the rest of their lives without undue risks.
The level annuity will increasingly fail to fit this requirement because the rates are low and people are living longer.
Drawdown provides the solution to this in some respects but does not necessarily tick the without undue risk category.
The holy grail -probably a mix of the two forms of income – needs to be found and increasingly it seems like the answer is going to come from products that look to get the best out of annuity and drawdown features in one.
I think the Government will achieve this balancing act but there is an elephant in the room. Once it does decide what to do with pensions, can it complete the reforms in a year? Or are these reforms going to be another A-Day that keeps being put back?
Billy Burrows is a partner at Burrows & Cummins