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Treasury stands firm on capped drawdown despite concerns

Treasury financial secretary Mark Hoban has dismissed concerns about capped drawdown despite investors facing significant drops in the annual income they can withdraw when they retire.

Capped drawdown was introduced as part of Government reforms to abolish compulsory annuitisation at age 75.

Following the changes, which came into force in April last year, the maximum amount a person in capped drawdown can withdraw from their pension pot each year was reduced from 120 per cent of the equivalent GAD annuity rate to 100 per cent.

This, coupled with plummeting gilt yields, has slashed savers’ annual pension income.

Last week, Money Marketing revealed that the Association of British Insurers is negotiating the issue with members ahead of formal discussions with the Government.

Conservative MP for Milton Keynes South Iain Stewart wrote to Hoban (pictured) in January after a constituent raised concerns about their falling annual drawdown income.

In his response, sent on March 20, 2012, Hoban says: “Whilst the Government reforms to extend and improve capped drawdown gives greater freedom, they do interact with the effectiveness of a fund manager’s strategy and gilt rates to determine the maximum drawdown.

“The Government appreciates that in the short term, some of the other factors affecting drawdown rates may be combining with the change in the annual withdrawal limit to reduce individuals’ total drawdown income.

“However, the Government’s reforms are based on longer term considerations; we are confident that the reforms will improve flexibility and income sustainability for savers for the future.”

Hoban concedes people under age 75 will see a reduction in pension of up to 17 per cent as a result of the reforms, although this figure does not take into account the impact of investment returns and gilt rates.


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There are 9 comments at the moment, we would love to hear your opinion too.

  1. What a 22 carat plonker this man really is.

  2. David Trenner - Intelligent Pensions 12th April 2012 at 4:06 pm

    I think that before attacking Mr Hoban we need to ask two questions:

    1. Who ever thought that 120% of GAD was a sensible idea?

    2. Who ever thought that taking Maximum GAD would be sustainable?

  3. Hoban is typical of the arrogance exhibited by today’s political class.

    Contrary to Mr Trenner’s implied thoughts on the subject, people should be left to make decisions which are in their own best interest including extracting as much money from their pension ‘pot’ as quickly as they see fit. Better off people who may have enjoyed 40% tax relief on their contributions and have other income sources in retirement can elect for Flexible Drawdown. But those of more modest means (having been duped to put money into personal pensions with illusory tax relief as the incentive) now realise their folly – they have been tricked by government and pensions salemen to hand over their money with little likelihood of getting a fair return.

    Hoban wouldn’t understand given he lives in an ivory tower like most of his mates and the quangocrats at Canary Wharf.

  4. Whilst I agree with David Trenner, as the previous anon poster said, there are reason why a client may want to draw (and be advised) more than 100% of GAD for a period of years. For instance if they retire at 60 and they just want to fill a short term income shortfall until an occupational pension scheme or the state scheme retirement date arrives.
    Added to that there is the irony of those clients who opted for “Third Way” plans such as the Hartford’s where clients have guaranteed income levels FOR LIFE now coming up for review which are HIGHER than the GAD rate will allow the insurer to pay, so either the client will have to opt for an annuity or accept deduced income.

  5. Whilst I agree with David Trenner’s comments, there are arguments in favour of getting as much out of your fund as quickly as you can, and of course most of these arguments are against the best interest of HMRC, not the Pensioner and his/her family, so perhaps it’s no surprise that Hoban has adopted an entrenched position.

    On the mechanics of it, the problem is not really the reductioon to 100% GAD (The increase to 120% always seemed daft).

    The real problem is the disastrously and artificially low Gilt yields, substantially driven by QE, with this just one of the unintended consequences, and perhaps a minor one at that.

    As I understand it, proposals to allow GAD rate to link to yields from a basket of securities, including Investment Grade Corporates, were dismissed out of hand by the Treasury, but I don’t think I’ve ever seen this discussed or explored any further?

  6. Surely government gilt yields are largely irrelevant with regards to the income being taken as the funds value is determined by the investment returns on the residual funds ?

    Limiting the income from drawdown funds based on gilt rates makes no sense!

    Just like everything else Hoban and his cohort does.

  7. Adviser:

    So, Mr Client, I’m sorry to be the bearer of sad news but it appears the government wants you to take less from your pension now so that when you die and the money passes to your wife they will have more fund to tax at 55%!

    When’s the next General Election?

    Not for another two years. But an Election won’t help. They’re all the same now. All out to enrich themselves from public funds whilst taxing the hide off us to pay for it.


  8. When has any UK Government ever admitted that the strategy they recently adopted was wrong?
    Admitting errors of judgement is hard for all of us, and I suspect that is the elephant in the room here.
    Otherwise an easy and logical compromise would be to say that whilst gilt yields exceed x the max GAD is 100% but should they fall below x max GAD can be increased to 120%. Very easy to implement (but it means that the recent cuts need reversing, and there lies the problem).
    The impact of QE has been hugely negative on drawdown investors GAD max, with gilt rates plummeting and some pensioners suffering material reductions in their income. However, looking for a Government to make logical pragmatic changes is about as likely as buying the winning ticket for the Euro Lottery!

  9. The reduction in income under specific circumstances has always been a clear risk associated with drawdown. Perhaps risk tolerance was not properly assessed for individuals in drawdown who find the current circumstances disastrous?

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