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Government plans reform of pension income rules
The government is debating whether to relax limits to the amount of income pensioners can draw down from their savings.
by William Robins on Nov 13, 2012 at 11:02
The government is considering relaxing the unpopular rules that limit income pensioners can take from their savings in retirement.
A growing number of people have opted for ‘income drawdown’ when they retire to avoid locking their pension savings into the low rate of a conventional annuity.
Many of these investors have become frustrated with rules brought in by the coalition government. These allowed a small number of individuals who could guarantee they had a £20,000 income to drawdown an unlimited amount of money from the rest of their savings.
However, most people in drawdown fall below the £20,000 threshold and have to comply with a limit set by the Government Actuary’s Department.
Before the 2010 reforms took effect individuals could take 120% of the income level set by GAD. This was reduced to 100% in order to prevent investors from depleting their savings too quickly.
However, MPs have come under mounting pressure from retirees hit by cuts of up to 50% in their income as the GAD rate has tracked annuity rates downward.
Citywire understands drawdown is being ‘seriously looked at’ by 10 Downing Street and the Treasury, and a possible change in the rules could be announced in the chancellor’s autumn statement next month.
Sipp (self-invested personal pension) provider A J Bell recently renewed its campaign to return the GAD rate to the pre-2011 level of 120% for those on capped drawdown. The campaign received responses from a number of MPs voicing their concern about cuts to drawdown income, including pensions minister Steve Webb.
A source close to the situation told Citywire’s New Model Adviser® magazine the government would not sanction a return to a GAD rate of 120% because it was concerned that it would appear to be making a U-turn but was looking at a range of alternative reforms.
These reforms include proposals from the Association of British Insurers (ABI), which has recommended the GAD rate’s link to 15-year gilt (government bond) yields be replaced with a link to a mix of higher yielding long-term corporate bonds alongside gilts.
A short-term fix could also be implemented, such as a temporary increase in the GAD limit for those in capped drawdown.
Adrian Boulding, pensions strategy director at Legal & General, said: ‘I think we will see something in the short term, an increase in statutory limits and that is at the GAD’s discretion. It has to be addressed because MPs are getting mailbags full of complaints.
‘In the longer term there should be a more serious look at what those in drawdown should be investing their money in and what is a sensible level at which they should be taking money out,’ he added.
Boulding said the ABI’s proposals had been well received by the industry and in Westminster.
ABI policy adviser Rob Yuille said: ‘[The government] is well aware of the concerns. We have set out changes that can be made quickly, without changing legislation. It would just take a change in guidance. It fixes a problem. It’s an urgent situation and we will keep pushing for this.’
Andrew Roberts, chairman of the Association of Member Directed Pension Schemes, said measures could be bundled in with scheduled changes to GAD tables as a result of the European Union ban on gender-based annuity rates.
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- Retirees in drawdown pensions braced for 30% income drop
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