Today the Autumn Statement confirmed there would be no change to how the income from drawdown would be calculated.
However, many in the industry have called for income drawdown to be de-coupled from annuity rates. AJ Bell's Mike Morrison puts forward an idea for how it should work.
Pensions seem to be a political football that never reaches the back of the net. Governments realise that people need to have pensions, and personal saving is better than the state having to provide, but any incentives - such as tax-relief - are expensive and difficult.
Decumulation is the other end of the spectrum, but it must be attractive for people to take an income stream from their pension. Today, the choice is effectively an annuity versus income drawdown, both of which have their advantages and their faults.
What about innovation for the future? Financial services products, such as pensions, have always been a difficult area for innovation in that it is not always clear how far the tax rules can be changed.
Income drawdown is about an individual being able to draw an income from the fund without annuitising. They will still be subject to investment risk, but with the restriction that income can only be taken from the fund at a level similar to an annuity to prevent the fund from running out.
In 2011, we finally lost the concept of compulsory annuitisation with the extension of capped drawdown and the introduction of flexible drawdown.
We also received the following statement from the Government: "The purpose of tax-relieved pension saving is to provide an income in retirement.
1. Any changes to the pension tax rules should not incur Exchequer cost and should not create any opportunities for tax avoidance.
2. Individuals should have the flexibility to decide when and how to best turn their pension savings into a retirement income, provided they have sufficient income to avoid exhausting savings prematurely and falling back on the state.
3. In-line with the ‘Exempt, Exempt, Taxed' (EET) model, pension benefits taken during an individual's lifetime should be taxed at Income Tax rates. The tax-free pension commencement lump sum will continue to be available.
4. On death, pension savings that have been accumulated with tax-relief should be taxed at an appropriate rate to recover past relief given, unless they are used to provide a pension for a dependant."
This was really the first time that the Treasury had seemed prepared to move away from the ‘annuities' line held previously - i.e. that you had to buy a secure income in the form of an annuity because you had been given tax relief.
Blueprint for innovation
Income drawdown has been at the whim of gilt yields and quantitative easing for the last few years, restricting the level of income that can be taken from the fund.
This has caused a lot of people an issue when coinciding with volatile markets, resulting in restricted pension income for many individuals.
Could we decouple GAD rates from gilt yields? In the campaigning for changes to the GAD rates, AJ Bell did submit an alternative to the Treasury with a different, yet somewhat simpler, approach.
Basic drawdown rate for funds
Age Maximum income p.a. as % of fund
Taking account of the Government's "provided they have sufficient income to avoid exhausting savings prematurely and falling back on the state" premise we also proposed that anyone with a pension pot above a secure safety level should be allowed to receive up to 10% of their pension until such time as their pension fell below the safety net. At that point they'd fall back to the limits above.
I have discussed this with advisers around the country and there seems to be an acceptance of the need for a simpler and, most importantly, more predictable retirement regime.
It would allow greater client understanding and also assist advisers in the long-term planning process, because sitting down and working through, say, a twenty-year cash-flow model would be much easier with a percentage-based withdrawal.
Mike Morrison is head of platform marketing at AJ Bell
Bought plans in 1988 and 1989
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