We are all aware of the rapid fall of gilt yields (an unintended consequence of quantitative easing) and how this - combined with volatile markets and the 2011 changes to the GAD rates - meant the ‘perfect storm’ for people in drawdown, whose income levels fell dramatically. The recent decision to restore the 20% uplift to the GAD maximum has been an attempt to address this problem to some extent.
In the 2013 Budget, the Treasury announced a full review of GAD rates, with a view to making sure that they ‘continue to reflect the annuity market’, but I guess my question really is, do they need to reflect the annuity market?
When drawdown started in 1995 it was regarded very much as an annuity deferral mechanism. As annuity rates have fallen, and with the prognosis not looking particularly good (increases in longevity, Solvency II and the growth of underwriting that removes the poorer lives from the annuity pool), drawdown has been seen as a real alternative, providing a similar level of income but with much more flexibility and investment risk substituted for the certainty but inflexibility of an annuity.
In its 2006 consultation ‘The Annuity Market’, the Treasury was keen to re-emphasise its requirement for an annuity:
“The ‘annuities deal’ in return for the generous tax relief on pensions saving, the Government requires individuals to turn their pension fund into a secure retirement income. This longstanding requirement dates back to the 1920s.
“However, by 2010 in ‘Removing the requirement to annuitise by age 75’ a new Government set out its “Principles for a new tax framework for retirement”:
No mention of annuities in this one!
From 3 above we have flexible drawdown and know that £20,000 p.a. is the amount needed to avoid falling back on state benefits.
So, let’s use this review to break the link – let’s express drawdown in a way that meets the principles above, but that does not make it susceptible to external influences (e.g. gilt yields). Removing the link to external influences and replacing it with fixed income limits will give more certainty to clients, which can’t be a bad thing.
Who knows - we might even make it a bit easier to understand, and a bit more attractive to consumers!
Mike Morrison
Head of Platform Marketing
AJ Bell