Call for change
Following changes to GAD tables and caps on income, drawdown no longer looks as attractive. So, asks Billy Mackay, is it time for this to change?
Momentum seems to be building behind lobbying on changing the rules on maximum income drawdown calculations. Within the past few weeks, e-mails and letters have come in from clients, advisers and MPs alike – all looking for ways to support the case for change.
Unfortunately, lobbying always carries the risk of sounding like a broken record. But with the number of people affected by this issue growing, it certainly seems worth letting the needle jump a little if it will encourage the people in power to take notice.
Besides, a good record with a scratch is surely preferable to the discordant tune offered by some. There is little doubt there needs to be greater industry collaboration if there is any chance of improving the situation for beleaguered pensioners.
Case in point
A recent case perfectly illustrates the scale of the problem facing some retirees.
In March 2007, Mr Smith, aged 67, had a drawdown fund valued at £250,000. Gilt yields at the time were 4.5 per cent, the old GAD tables were used and the 20 per cent uplift in drawdown calculations was still available, meaning Mr Smith’s maximum drawdown pension was £22,800 a year.
In March 2012 the pension had fallen in value to £225,000. By now Mr Smith was aged 72, gilt yields were 2.5 per cent, the new lower GAD tables were used and the 20 per cent uplift in drawdown calculations was no longer available. Mr Smith’s maximum drawdown pension had now fallen to £15,975 a year – a 30 per cent reduction.
Naturally, the client rather struggled with the concept of being five years older, having a fund that had fallen by 10 per cent, while seeing income drop by 30 per cent.
Falling below annuities
For clients looking at income drawdown for the first time, there is now a rather perverse situation in which the maximum pension available is actually lower than that available from a typical annuity.
In order to avoid excessive reductions in drawdown funds, there is no doubt that there has to be a careful balance between the clients’ desire for flexibility and the government’s requirement for safeguards. A position where annuity income is higher than maximum drawdown clearly demonstrates that the government has this balance wrong.
The new GAD tables, introduced from 6 April 2011, were intended to reflect more up-to-date life expectancy data. Based on that policy objective (and ignoring any additional flexibility to reflect the fact maximum drawdown income is an option, rather than a compulsion), you would expect current GAD income levels to be broadly in line with current market annuity rates.
However, as Table 1 shows, a significant increase in income can be gained by taking an annuity, rather than opting for drawdown.
Is it time to change the record? Should we all just give up? Well, until someone provides evidence that counters the case for change, there is still every reason to leave the record playing. Apart from anything else, recent communications suggest that the issue is not going away and with a little luck it might even become an earworm.
Billy Mackay is marketing director at AJ Bell