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.