Personal PensionMay 15 2013

‘Income drawdown a real alternative to annuities’

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The head of platform marketing for AJ Bell said income drawdown was a “real alternative” to the troubled annuities market and called for it to be calculated against fixed income limits to shield against harmful “external influences”, such as falling gilt yields.

The Treasury announced a review of GAD drawdown tables in this year’s Budget so they can “continue to reflect the annuity market”. But Mr Morrison questioned this and said the review should be used to align income drawdown to principals set out by the government in 2010 to allowed flexible drawdown if a pension pot was big enough to avoid state dependency.

He said: “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.”

Mr Morrison also welcomed Chancellor George Osborne’s Budget announcement that the maximum drawdown rate would be increased to 120 per cent.

He said: “As annuity rates have fallen, and with the prognosis not looking particularly good, 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.”

The higher drawdown level of 120 per cent has been restored following a controversial reduction back down to 100 per cent in April 2011. The cut was aimed at discouraging people from using up too much of their funds and then turning to the state for help, but it also came at a time of plummeting gilt yields, eroding the value of pension pots. The new limit automatically kicks in from the start of a client’s next drawdown year. GAD rates will also be reviewed to ensure they mirror the annuity market. This could mean they are based on a mixture of gilts and investment-grade corporate bonds in the future – currently, they are calculated using 15-year gilt yields.

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Steven Robinson, managing director of Somerset-based Clarke Robinson & Co, said: “I agree 100 per cent with this. Drawdown rates should be based on the ability of the fund to provide an income in retirement in the long-term.”