Reintroduce 120% GAD limit
Surely the worst aspect of the government’s overhaul of drawdown in 2011 must be the reduction in maximum withdrawal levels from a capped drawdown arrangement from 120 per cent to 100 per cent of the Government Actuary’s Department limits.
In practice, at quinquennial review this has seen maximum withdrawal levels fall by close to 50 per cent in most cases and more than 50 per cent in a few.
Understandably this is hitting pensioners hard, particularly those below the age of 65 who have yet to see the benefit of state pension to boost their income and make up any shortfall. With annuity rates continuing to fall, purchase of a traditional guaranteed annuity is not an attractive alternative for a reasonably healthy pensioner.
The reality is that, if living and income standards are to be maintained, other assets will need to be liquidated which in turn is an option most are reluctant to consider.
While it can be argued, and is indeed the case, that clients in capped drawdown were aware of the risk of a reduction in income from outset, this is nonetheless an unpalatable development when it happens. In my experience, most clients in drawdown are responsible and intelligent individuals who worked hard throughout their lives and simply want to enjoy the fruits of their labours in the form of a decent income in retirement.
For the most part they have other substantial assets and the last thing that they would do would be to go back, cap in hand, to the department for work and pensions to claim benefits in the event (unlikely in many cases) of their pension fund depleting.
Indeed, with the introduction of flexible drawdown set at an arbitrary level of £20,000 for those lucky enough to have final salary benefits, the government has sent out a badly-mixed message. Why should the client who can generate the same level of income from their assets in any way, not enjoy a similar degree of flexibility?
In my view, the government should immediately reintroduce the 120 per cent GAD withdrawal limit and allow responsible pensioners in capped drawdown to manage their financial affairs in their own way with a reasonable degree of flexibility.