Providers are calling on the government to consider ill health terms when setting rates for income drawdown clients, saying the system is out of date compared with annuities.
A “complete overhaul” of the system is necessary, according to InvestAcc, given that income drawdown clients are not able to access enhanced terms linked to ill health or reduced life expectancy.
“The drawdown rules have been tinkered with a number of times since they were originally introduced in 1995, but a complete overhaul is well overdue,” said Nigel Bennett, business development manager at InvestAcc.
“Drawdown income limits don’t reflect the health of the individual, and with an ever-increasing proportion of the population qualifying for impaired life annuity rates, then perhaps drawdown income limits should reflect this too.”
It is estimated that around 40 per cent of the population could qualify for enhanced terms when purchasing an annuity, allowing them to secure a higher lifetime income due to their decreased life expectancy.
However, no such terms exist for income drawdown; rates for all clients are based on the government actuary’s department (Gad) rates, with up to 120 per cent of the limit allowable for withdrawals.
“Impaired life or enhanced annuities are now commonly used, with a move towards annuities becoming individually underwritten resulting in higher income levels for those with lower life expectancy,” said Robert Graves, head of pensions technical services at Rowanmoor. “This contrasts with Gad rates that are based on average life expectancy.”
Annuities and drawdown are very different products, he added, so drawdown should be governed by its own set of principles rather than being aligned to annuities.
The income drawdown market is considered further in Money Management’s first ever survey of the market, to be published in the July issue.
