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Change annuity link to stop drawdown drop

by Hyman Wolanski on Nov 13, 2012 at 12:41

Change annuity link to stop drawdown drop

People who have come to rely on a retirement income from drawdown are facing major cuts in the amount of money available. Not only is this a significant issue for clients, but the Financial Services Authority (FSA) is concerned about the inadequate and unsuitable advice on drawdown it has uncovered.

Drawdown is far from straightforward and is riddled with risks. However, I have a proposition that would make drawdown more straightforward and help the advice process.

The maximum amount of income that can be taken is linked to the annuity rate for a single person and is reviewed at intervals; every three years up to age 75 and annually thereafter.

However, annuity rates have fallen significantly, contributing to falls of as much as 50% when income is recalculated.

There is a lot of pressure on the government to address the problem, with possible options varying from quick fixes, such as reinstating the old 120% factor that used to apply to the Government Actuary’s Department’s annuity rates or using higher corporate bond yields, to a full revamp of the system.

Age-linked annuity rates

My preferred option to address the issue is incredibly simple: just change the annuity rate that is used for the drawdown calculation to the member’s age: a 60-year-old could withdraw income of £60 per £1,000 of fund, a 75-year-old could withdraw £75 per £1,000 and so on.

There is no underlying theoretical basis for this approach, but it works. It broadly follows the pattern of annuity rates that increase with age.

It does not require any complex actuarial tables and introduces certainty into the picture. This last factor would help retirement planning enormously because it means that those in drawdown would know in advance where they stand.

Any proposal to change a system will have its opponents, and I have no doubt this approach can be tweaked, if necessary, to deal with any valid criticisms.

No-reduction factor

An alternative is to tweak the current system by introducing a no-reduction factor into the equation: whenever the maximum income drawdown is recalculated, the old maximum income remains in place if the new one is lower.

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5 comments so far. Why not have your say?

Andrew Roberts

Nov 14, 2012 at 09:20

It's fantatsic to see so many different ideas though of course Government will not respond to suggestions put out to the press. I'd therefore like to encouarge all AMPS members to submit any suggestions for how to amend drawdown rules to the committee by adding comments to the news story in the members only section at www.ampsonline.co.uk. Any non-AMPS members, feel free to email suggestions to andrew.roberts@barnett-waddingham.co.uk.

I have seen a number of suggestions recently in the press that have not made it to the AMPS committee (e.g. Hyman's upwards only revision).

The drawdown rate being equal to age has been suggested before but this will store up other issues as e.g. by the time you get to age 75 the current rate is higher than £75 per £1,000 so it helps out younger people but not older people, meaning that there will be more left over on death to distribute at 55% tax which would lead people to criticise Government for having a system that stops people accessing their pension during their lifetime at income tax rates. People are already using this argument for the current rates which are higher than £75 per £1,000.

With Hyman's suggestion of upwards only I think I now have 15 different suggestions. I'll try and post them at the public section of www.ampsonline.co.uk in due course.

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Andrew Roberts

Nov 14, 2012 at 10:04

The list (18 options in fact) is here: http://www.ampsonline.co.uk/Home/Press/Read/2012-11-14-AMPS-Curated-List-of-Drawdown-Alternatives

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alan nedas

Nov 15, 2012 at 15:12

Well done HW keep up the lateral thinking when camping outside No.10!

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Paul Denbigh

Nov 15, 2012 at 17:55

Excellent, Hyman. Simple is best.

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Graham Newman

Nov 15, 2012 at 18:45

An annuity is usually sub7% & we say goodbye to our capital.

There are several unit trusts that pay income approaching 7% & the capital may fluctuate but does not disappear.

Why can't the authorities let us invest in one or a spread of those unit trusts, receive the income plus say 1% pa up to age 70, 1.5% pa to age 75 or 80 etc

If annuity rates shoot up, start one with the remaining fund

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