The past two years have proved some of the most difficult in income drawdown’s relatively short history.
The positive introduction of capped and flexible drawdown in April 2011 has been largely eclipsed by continually low Gad rates and the unexpected lowering of the maximum income limit from 120 per cent to 100 per cent of Gad. The latter proved to be poorly thought through and has now been reversed back to 120 per cent again.
The end results risk reduced confidence in drawdown and retirement saving, but it is worth looking at these recent events in more detail to predict the future for drawdown.
A brief history of Gad rates
Gad rates have been on a downward trend for a number of years. This was accelerated by the government’s quantitative easing programme, which prompted HMRC to introduce a minimum ‘collar’ of 2 per cent Gad. Rates subsequently hit this collar in August 2012. There’s little comfort to be gained in knowing that annuity rates have followed the same trend, as shown in Graph 1, although not to the same extent.
But the numbers do not tell the individual stories of the clients behind them. Even with investment performance keeping pace with inflation, drawdown users at a five-year review in 2012 would have seen their incomes drop by more than 40 per cent. Erratic investment performance and changing Gad rates could be explained if not expected, but the legislative change lowering to 100 per cent Gad was unforeseen.
A perfect example of the growing complexity of our pension system was illustrated by the decision to restore the Gad maximum income limit to 120 per cent. As implemented, the very clients who needed the reversal the most – those who had already crystallised into the 100 per cent Gad regime – were unable to benefit from the reversal until their income anniversary up to a year later.
Right to increase?
In implementing a return to the 120 per cent regime, advisers might well have been surprised that providers did not take a consistent approach. The majority of providers decided they would maintain the existing income level, for example a client taking 100 per cent of their income limit would continue to be paid 100 per cent, even though their new entitlement was increased to 120 per cent. However, a significant minority took the opposite view and faced some criticism in doing so. They took the decision to move any client taking maximum income under the lower limit onto the maximum income under the new, higher limit.
Although the pros and cons of either approach can be debated, there’s no doubt that different approaches amid a period of significant change has led to some confusion among both advisers and their clients. This has not helped restore confidence in drawdown.
While Sipp operators continue to experience significant change, it seems the rules for drawdown have now completed their growing pains, allowing advisers and their clients a period of stability desperately needed in order to plan ahead. That has come just in time, as the UK is entering a highly significant demographic shift.
