Final versions of the maximum drawdown levels available after A-Day suggest drawdown could provide better value than an annuity for those in the earlier stages of retirement.
Her Majesty’s Revenue and Customs (HMRC) have released the final figures from the Government Actuary Department (GAD) for the maximum drawdown levels for unsecured and alternatively secured pensions (ASP).
Essentially the tables are merely a confirmation of those proposed in the consultation published in November last year, as the figures are exactly the same.
After A-day people in retirement who opt to receive income drawdown, or an unsecured pension, will no longer have to buy an annuity when they reach the age of 75. Instead they can continue with income drawdown under what will be called an alternatively secured pension, but with reduced maximum limits.
People in drawdown can currently take between 35% and 100% of the maximum GAD levels in force at the moment, but under the new tables, the limits change to a minimum of 0% and 120% of the maximum levels.
However, limits for the ASP have been made lower than the unsecured pension to keep withdrawals at a sustainable level which stop people over 75 from draining their funds and falling back onto means-tested state benefits.
For unsecured pension drawdown, separate figures have been presented for men and women which compare the current maximum to the new proposed regime covering all ages up to 75 years old. Although there is only a small change, the figures do suggest men will fair worse than women between the ages of 55 to 75.
But despite these slightly lower figures, a comparison between the new drawdown tables against a comparable annuity which has a 100% spouse’s pension attached, show the drawdown figures in a more generous light with the ability to provide much more flexibility of maximum and minimum incomes than an annuity.
According to John Lawson, head of pensions policy at Standard Life, annuity rates are suffering on two counts:
- The artificially-low gilt yields because of excess demand, in particular form closed defined-benefit schemes which are attempting to match their assets to their liabilities.
- The mortality cross-subsidy, which is the amount you stand to gain from people dying before you, is rapidly diminishing below the age of 75.This means with less people dying, the money shared out among survivors is less.
Lawson adds: “The market in gilts is irrational at the moment, purely driven by demand rather than good fundamentals. So annuities are looking poorer value for younger people, as compared to other asset classes gilts are not offering good value for money. Based on these drawdown figures people would be better off staying in drawdown until they are 70 or maybe later."
But he warns although the maximum drawdown rates are more generous than comparable annuities, drawing the maximum can damage a pensions fund, particularly if it is drawing income from an equity portfolio in a falling market.
Rachel Vahey, head of pensions development at Scottish Equitable, says the significant thing about these new figures is while the headline maximum income rate has increased to 120%, this doesn’t actually result in a uniformly higher income figure at all ages.
She adds: “Sometimes the maximum income is lower on the new basis than on the old, especially for older men. With, overall, women fairing better than men, financial advisers should now be considering whether to move their client’s income onto the new basis from April.”
Vahey says it is important advisers are aware moving clients to unsecured income at A-day will mean the ability to take no income for those who previously chose the minimum, which is a big improvement from the current minimum of 35%, but moving to the A-day terms doesn't necessarily mean the maximum income will automatically increase substantially.
Lawson points out as advisers will be looking for the better deal for their clients, they will also have to ask themselves what assets are going to give the best yields, particularly in light of the severely depressed index-linked gilt market.
As a result, he suggests the way people take retirement income will probably change rapidly going forward, as the poor value of annuities will not go unnoticed for long, with the drawdown market picking up strongly, while the annuity market will become quite flat going forward.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7968 4558 or email [email protected]IFAonline
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