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Gov’t bows to pressure and plots drawdown reform

by William Robins on Nov 13, 2012 at 10:00

Gov’t bows to pressure and plots drawdown reform

The government is considering introducing imminent changes to the drawdown regime as MPs come under mounting pressure from retirees hit by cuts of up to 50% in their income.

New Model Adviser® 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.

The amount of income available through drawdown contracts has fallen for many pensioners in the past couple of years due to a reduction in gilt yields and rules limiting the Government Actuary’s Department (GAD) rate to 100% for those who could not guarantee a £20,000 annual income.

Sipp provider AJ 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 New Model Adviser® 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 be relinked from 15-year gilt yields to a mix of long-term corporate bonds and gilt yields.

A short-term fix could also be implemented, such as a temporary increase in the GAD limit for those in capped drawdown.

Adrian Boulding (pictured), 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.’

Boulding said the ABI’s proposals had been well received by the industry and in Westminster.

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26 comments so far. Why not have your say?

Jonathan Kirby

Nov 13, 2012 at 10:48

Lets hope they come up with something sensible.

What is it with government though that they are so scared of admitting they are wrong?

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W K Clark

Nov 13, 2012 at 10:55

Funny isn't it, we as an industry say they have made a mistake but once the MP's mailbags get full with disgruntled letters from voters something gets done. I tell you Yes minister is alive and well!!!

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John Housden

Nov 13, 2012 at 11:10

When the Treasury undertook its consultations on the drawdown changes in late 2010, I did suggest that AA-rated corporate bond yields would make more sense than gilt yields, but the government side were firmly against any such change.Now it might add 1% to the underlying rate - useful but not much solace for those facing a 50% hit to income.

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Peter J Gabbett

Nov 13, 2012 at 11:18

My thought is that if the government changed the GAD rates back to 120% they would be seen as caring of us pensioners and in tune with us.

The opposition are not going to have a go on this matter.

Its how you spin it, no change there then

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Keith Cobby

Nov 13, 2012 at 11:58

My retirement funds (including ISAs) will remain fully invested in long-only equity funds. Gilt yields will have no bearing on my returns.

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Gerry Cooper

Nov 13, 2012 at 12:30

@ Keith Cobby - OK, good point, but what does it have to do with the article?

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steve smith 2

Nov 13, 2012 at 13:09

The primary reason why incomes are being decimated is not 120% going to 100% !!! That’s a 17% reduction. It is because most drawdown customers were wrongly advised to invest in equities!

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Keith Cobby

Nov 13, 2012 at 13:11

This article is about the GAD rates used for income drawdown. My point is that many people will remain invested in equities and so their return will not be linked to gilts. In my view it would be better to link drawdown rates to age.

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Nov 13, 2012 at 13:26

@Keith Cobby......erm, drawdown rates are linked to age !

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Philip Wise

Nov 13, 2012 at 13:30

They could have a look at the Irish legislation. Makes a lot more sense than ours.

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Gerry Cooper

Nov 13, 2012 at 13:31

Ok Keith, I understand your point, but the GAD rate, as well as linking to Gilt yields, does link to age, as do Annuity rates, aslo dependfent upon Gilt yields, and it's this which is the problem.

@ Steve Smith 2 - Equities are not the problem. A broad based portfolio of Equity, Bond and some Cash holdings could have broadly maintained income, Are you suggesting that assets should have been held in Cash?

If it had not been for the calamitous fall in Gilt yields which, in case you hadn't noticed, has also decimated Annuity rates and damaged Defined Benefit schemes, then GAD rates would not have declined as they did. Nobody is suggesting that the reduction to 100% was the problem, but restoring it to 120% would ease current difficulties slightly. .

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John Frink

Nov 13, 2012 at 13:36

It's a hopeless situation for the government - allow people to take 120% or 150% and they'll watch as pension funds are decimated through unsustainable withdrawals and also see the annuity market (buying gilts...) wrecked as people have little choice but to use drawdown to get a reasonable (short term) income. If they do nothing, then pensions become a joke and people dependent on those pensions start to struggle.

I have no idea what the answer is - maybe requiring a min amount invested in gilts (clear the deficit) and the government underwritting a minimum level of return? I don't think there's any magic bullet

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Jonathan Kirby

Nov 13, 2012 at 13:57

@ John Frink

Surely the answer is to let responsible IFAs manage their clients expectations and invest suitably.

There is an anomaly between annuitizing and drawdown in that with the annuity the fund is expected to be completely exhausted over the average lifetime yet drawdown rules prevent this.

A cynic might say that this is so the government can then plunder a further 55% of the fund having taxed the holder on everything they can through life, they want to grab extra on death.

Is there room in the market for a product that can actually insure against the risk of the fund being exhausted? I know we have the likes of Metlife who guarantee income but surely there could be a cheap way of insuring this risk.

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Gerry Cooper

Nov 13, 2012 at 14:36

@ Jonathan Kirby - A nice idea Jonathan, but even if it were possible, I bet it wouldn't be cheap.

The problem is almost wholy down to the artificially high price of Gilts, partly due to global issues, bur very substantially as a result of the long and sustained QE programme. Great for the UK taxpayer - maybe, but wait for the long term cost to come through the system, but disastrous for all UK pensions, whether OPS, Annuities or Drawdown.

The proposal from John Housden, linking the GAD rate to a broader basket of Bonds, makes a gret deal of sense, given that spreads have widened in recognition of the 'artificial' low yields o available from Gilts. I disagree with John though about a 1% increase to the GAD rate. I think that it would make a significant and valuable difference.

I also agree with other comments concerning the responsibility of advisers, to encourage clients not to take the maximum possible withdrawal, or at least, not on a regular basis, but again, it's the flexibility of Drawdown that is a major attraction.

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Keith Cobby

Nov 13, 2012 at 15:15

I know that the GAD rates are based on age, but the point I was making (badly) was to base them wholly on age ie. 5% during your 50s, 6% during your 60s etc.

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Nick White

Nov 13, 2012 at 16:27

Well done to those who have put solid, consistent effort into seeking to persuade the Treasury to look at this again.

It's easy to say that HM Treasury/HMRC got it wrong in 2010/11, but all reforms of pensions tax legislation are bound to have some flaws, either because consequences aren't obvious at the time or because the changes are a necessary compromise between factions with different interests, or because simplicity is favoured over individual fairness, or a new set of ministers are keen to make their mark as quickly as possible....

It's good that noises are being made about reform from within HM Government, only 18 months after the 100% limit was introduced. There seems to be more pragmatism than we experienced under certain New Labour ministers.

It is important to be optimistic, without being naive......

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Phil Bradley

Nov 13, 2012 at 19:34

This could get much worse if something isnt done quickly, Whilst winding my merry way to the office on Monday I bumped into an old colleague who had carved out a career in Compliance, 'whats going on out there' I happened to ask and then he proceeded to tell me that a major network was putting out to tender its drawdown review, 'oh are you interested' I say, he chuckled and then told me that they were proposing writing to clients for the last ten years, then asking them was a conventional annuity discussed and equally do they feel disadvantaged by their present drawdown considered the present market. Now annuity rates were in excess of 8% back in the day and maximum GAD is substantially lower than this and the chances of further cuts are still there, I wonder which clients will recall they were 'railroaded' or 'cajoled' into USP!!! I can see this problem escalating further. Please help us!

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steve smith 2

Nov 13, 2012 at 20:37

There is no help to be had other than a miracle in the markets. I always thought it a little ironic that the same time the government bought in MFR to effectively stop occupational schemes from matching pensioner liability with high risk equities they bought out drawdown legislation allowing individuals to do just that. And yes, things will get worse.

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Nov 13, 2012 at 22:00

@gerry cooper and @jonathan Kirkby... these plans exist in the US, a proportion of fund us used to Bunyan income stream from a predetermined age, provided the client reaches that age of course... the amount of income and the selected age clearly go ern the offset capital needed... however this does free up the remaining capital to be exhausted...free of longevity concerns

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Julian Stevens

Nov 14, 2012 at 10:00

The first thing that needs to be done is to scrap all and any link with annuity rates. Then allow providers to create and market a Retirement Income Bond, under which the level of income will be geared to utilisation of the entire fund over the remaining (underwritten) lifetime of the retiree, allowing for annual fund growth of say 5% or 6% p.a. with an insurance element against the fund burning out before death. That surely ticks the two most important boxes ~ higher levels of income (tax-assessable, so it'd be good for the Exchequer) liberated into the economy whilst at the same time addressing the risk of retirees being washed up in later life with none.

On what basis could the government reasonably reject such a proposal?

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Nov 14, 2012 at 17:25

The real problem with Gad rates is that they are not underwritten on the health of the individual. A person in poor health will waste most of their pension assets, whilst a fit person could empty the pot if the rules were too lax. The government have forgotten that pensions are their money.

Capping drawdown is only so the person doesn't exhaust their pension & end up supported by the state. I would remove GAD rate capping. Instead allow them to draw out what they want as long as there remains sufficient funds in the pot to buy an annuity that produces £10k a year at each review date. Why £10K - because with a state pension soon to be £10k they would have an income that takes them out of the benefit system.

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Paul Lewis via mobile

Nov 14, 2012 at 18:29

I have just received my annual pension payment. I also received the adjusted payment value first next year. If this government continues with its meddling I will have a reduction equal to 58.35%. How can anyone be expected to survive on that loss? This pension is my private pension. Every penny was invested by me. No help, no added value by another body. Just me. How can a government rule change have such an effect on my money. To be honest the pension market is a rip off, now the rule changes make it made to invest your money in a pension. Let's hope people power does the trick and forces a u-turn. Would MP's take a 58% reduction in wages. I think not.

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Gerry Cooper

Nov 14, 2012 at 18:53

@ Paul Lewis - I assume you were takin the Maximum permitted withdrawal.

Some of the questions to address are:

Should you have been doing so?

Why were you doing so?

Was it realistic to do so?

In my view, the max GAD calculation, especially at 120%, should have been used by clients and advisers as an 'occasional' facility, perhaps to take a larger beneft in one plan year following, or followed by, a period of much smaller withdrawals.

Using this strategy, the benefit reduction would have been more manageable.

Notwithstanding the alternative suggestions being put forward, the fact is that the Income Withdrawal rules, as we had them for some years, would almost certainly ensure that a prolonged period of Max GAD drawdown would lead to a benefit reduction at some point, regardless of the reduction now brought about as a result of plunging Gilt yields.

On Julian's point "On what basis could the government reasonably reject such a proposal?"

On no reasonable basis perhaps, but how about crass ignorance and stupidity?

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Paul Lewis via mobile

Dec 03, 2012 at 20:04

To answer Gerry Cooper. I had taken 5% pa of the funds worth. Hardly taking risks with my long term pension longevity. I also used my annual remuneration in an investment that gave easy access thus boosted my available spending power. If I could removed all of my fund and reinvest elsewhere I would. My fund had earned It's value already so what has it to with guilt? The Government has contributed nothing to the fund so why interfere with people like me. I fully understand pension schemes that are supported by the tax payer needs to be reviewed. But to interfere with money they had nothing to do with is beyond me. Finally do you think Gerry that 5% Pa is excessive?

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Gerry Cooper

Dec 04, 2012 at 12:25

@ Paul Lewis - My assumption that you were taking Max GAD drawdown was obviously incorrect, and therefore the questions I had posed are irrelevant, but it does raise other questions.

To answer your question then, no, I don't think that 5% withdrawal should have been unrealistic or excessive, and I'm therefore surprised at the scale of the reduction you have reported.

I assume from the way you have commented, that you are not an IFA, and if not, assuming you have an IFA advising you, whether the large fall in Max GAD is as a result pof a large fall in the value of the Investment portfolio in your plan, and if this is the case, whether the portfolio matched your needs and risk attitude.

However, in the context of this blog, these are essentially rhetorical questions which, if you are indeed not an Adviser, you would no doubt have discussed with whoever is your appointed IFA.

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Paul Lewis via mobile

Dec 05, 2012 at 12:08

No Gerry I am a retired business man. I do have an IFA contact who set this up. I was a trustee of my companies with profit scheme. We decided to move it to a Drawdown scheme. This is my final year before the first review. That review was carried out by Friends Life. Not the IFA. The figures are shocking for next year yet the fund value is reasonably stable. Margetts are the fund manager and are delivering well under the circumstance. I fail to understand why in my later years I have to suffer so much because of meddling by the rule changes. I saved hard for this period in my life. The government wants us to do that, but proved that pension schemes are a no no. Charges and profiteering by company pension providers along with meddling equals pensions are a bad move. I came to this forum in the hope that the powers that be would listen to good advise and to reverse the changes of 2010.

My IFA Was paid £5000 for transferring to the drawdown scheme a disgusting amount for a small job. No wonder schemes are suffering. So much greed is destructive. Sorry Gerry, but I felt I needed to say it as it is for so many ordinary folk.

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