April 2011 saw big changes to the rules on members drawing income from their personal pensions, but some adverse effects of these are now being seen more clearly. No one wants to advocate making changes to income drawdown again so soon but, when there have been so many (surely unintended) consequences, is it right to review and see if there is a better outcome for investors?
The good news
The changes to personal pensions in the Budget of April 2011 were not all bad, with many positive amendments made. The biggest was the return to three-yearly reviews from the previous five years. Investment volatility means that fund values can change significantly and waiting five years to review a member’s maximum income is just too long, particularly in current volatile markets. Things could change significantly over this time, either positively or negatively, but the ongoing impact is the same – waiting too long to review can have a negative impact on your client’s maximum income.
Many advisers review income needs for their clients annually, so this presents minimal issue for them. But consider the surge of execution-only self-invested personal pensions (SIPPs). The SIPP investors may be going into drawdown but not reviewing their income limits until the provider contacts them five years later. The drop in income due to the GAD rate reduction could come as a shock to many – some may have been blissfully unaware of changes to legislation – resulting in a possible significant impact on their lifestyle.
Another good news story was the introduction of flexible drawdown. While only affecting a small number of investors, it is safe to say that it has given real benefits, by simplifying planning or allowing investors to both plan their income and maximise death benefits.
Flexible drawdown is not for everyone and there are many investors who would not be eligible, but in the bespoke end of the SIPP market it proved very popular at the beginning of the 2012 tax year.
That may be because it has taken some time for people to plan their finances to meet the minimum income requirement of £20,000. There were also many investors wanting to take advantage of carry forward last year who may have wanted to maximise their contributions and fund before moving into flexible drawdown, after which no further contributions can be paid.
While flexible drawdown is clearly not a mainstream option, it provides real benefits for those clients who have planned well and so should help encourage more people to maximise their pension arrangements.
There is also good news for those aged over 75, because the GAD rates now go as high as age 85. This is a significant increase from the maximum incomes under the old rules that meant an 85-year-old would get the same income as a 75-year-old. In practice, at current gilt yield rates, this is a rise from £104 to £143 per £1,000 of fund value.
The perfect storm
In summer 2010, during planning, some of the income drawdown changes may have seemed fairly minor to the Government, being designed to protect investors from eroding their funds. But their effect has been multiplied many times by wider economic factors.