Andy Bell, Actuary and Chief Executive of investment platform AJ Bell says, “I have been vocal in suggesting that the current drawdown regime is in need of a comprehensive review and thought it was time to commit to the basis for an alternative regime. My proposals are simple, fair, tax generative, will boost spending and are a vote winner. What more could the Government want?”
Bell continues, “The thrust of our concerns can be distilled into something fairly simple. The combination of the drawdown rules introduced from April 2011 and the continued reliance on 15 year gilt yields as a means for calculating maximum drawdown income have caused an imbalance between the need, which I accept, for risk mitigation and the flexibility
which clients value.”
When devising the blueprint, I concluded that the alternative rules must:-
Our blueprint is set out in the tables below.
A comparison of the new proposals with current annuity rates and capped drawdown maximum income levels is set out below:
The comparison uses capped drawdown factors for a man commencing drawdown in both November 2007 and November 2012 with a fund of £100,000 and annuity rates without guarantees or widow’s pension taken from the Money Advice Service website for a man in the M32 postcode area without any lifestyle or medical enhancements.)
Bell continued “The blueprint is based on the simple premise that there is an increased risk of individuals falling back on state benefits if they hold pensions valued below a certain figure. I have used £200,000 but this could be set at a different level. Whilst savers hold pensions above this value then the risk decreases and greater flexibility in drawdown income
can be afforded to them. If their pensions fall below this value then the additional flexibility is removed and they fall back on the basic drawdown rates.
“There are wrinkles in terms of savers with multiple pension pots, those in phased drawdown and the valuation of different types of pension but the above acts as a simple starting point. I would keep the rules simple and only look at the value of drawdown funds in the respective pension scheme when considering whether the enhanced rate should apply i.e. ignore uncrystallised funds and funds in other pension schemes.
“These rules could operate in tandem with flexible drawdown, although there would be merit in scrapping the flexible drawdown rules entirely given that uptake has been so low. The introduction of flexible drawdown does confirm that the Government’s main concern in drawdown policy is to minimise any risk that individuals will fall back on state benefits because of excessive fund depletion. This is an understandable concern but I believe the risk has been overstated. It is not clear how much reliance was placed on the research carried out by the Pensions Policy Institute into the risk of fund depletion. What is clear however is that ignoring the protection offered by triennial and annual income reviews, rendered the PPI’s research fundamentally flawed.
Bell concludes, “Politically, this would lead to enhanced tax revenues and increased spending as my conclusion is that pension savers want to draw more taxable income than they can at the moment and it normally only makes sense to draw down on pension savings if they are to be spent.”