Name of MP
Address
Address
Address
Address
Date -
Dear name of MP,
Call for action on income drawdown limits
I am writing to you to ask you to press the Government to urgently review the way in which maximum income drawdown levels are calculated.
Hundreds of thousands of individuals who are already in income drawdown are seeing their maximum income drawdown fall by 40% - 50% because of legislative changes introduced in 2011 and wider economic factors.
Many thousands more who are approaching retirement are faced with either purchasing an annuity whilst rates are at all-time lows or choosing income drawdown, at a time when the maximum income available from the latter has been pushed below the income available from an annuity.
The full background to my request is explained in the attached “AJ Bell Call for drawdown change” summary which I have attached to my letter.
I wish to add my support to AJ Bell’s call for a review of the maximum income drawdown calculation and a temporary re-instatement of the calculation rules which applied prior to April 2011.
Yours sincerely
Name
CC Andy Bell, CEO, AJ Bell
Call for drawdown change
Most pension savers have two options when they wish to receive a lump sum and pension from their scheme – a lifetime annuity and income drawdown.
A lifetime annuity offers investors security of income but typically sets in stone the future pension income of the saver at outset.
Income drawdown offers flexibility of income to savers as they can choose a level of income they wish to take up to a Government set maximum and are free to alter this at any time. Income drawdown does not offer the security of income offered by most annuities as the pension fund remains subject to fluctuations in a number of factors, the most important of which is changes in the value of the pension fund.
The maximum pension available to savers who opt for income drawdown has typically been higher than that available to those who choose annuities. This reflected the fact that, whilst the flexibility to take a higher income if needed was welcomed, the majority of drawdown savers did not elect to take their maximum drawdown every year.
Since 2011 a combination of legislative changes and economic factors has led to a significant fall in the maximum income available to income drawdown savers. Whilst annuities have also fallen because of economic factors, the additional impact of the legislative changes has meant that income drawdown savers have seen much more significant falls.
Savers already in drawdown are facing severe hardship as they see their maximum income fall by 40% or more as it falls due for its regular review. Those who are deciding between an annuity and income drawdown are being forced into a catch-22 situation. The income available from an annuity is in many cases now higher than the maximum pension available under income drawdown, but this is encouraging savers to lock their income into an annuity in spite of annuity rates being at an all time low.
The Government legislated because it was concerned about the risk of excessive fund depletion but the balance between flexibility and risk mitigation has clearly been tipped too far in the latter direction. Research published by the Pensions Policy Institute into the risk of fund depletion is seriously flawed as it takes no account of the protection offered by the regular reviews which must be carried out on the maximum income drawdown. We have now reached a situation where, for every £100,000 of pension held by a 65 year old male, a maximum of £5,300 per annum can be withdrawn.
Perversely, at the same time as restricting the income which could be withdrawn from an income drawdown fund, the Government also introduced a concept which allows some savers to withdraw all of their pension fund in one go. This is called flexible drawdown.
To qualify for flexible drawdown a saver must have secure pension income – broadly State Pensions and annuities – of at least £20,000 per annum. This condition reflects the Government’s desire to ensure that no-one who uses flexible drawdown will need to fall back on to income-related state benefits.
If policy on flexible drawdown can be based on the risk of an individual falling back on income-related state benefits, it would seem logical that the policy on income drawdown is set on the same basis. However no evidence has been provided or research published indicating that any such risk exists. The protection offered by the regular reviews of maximum income which were ignored by the flawed research offer more than sufficient protection against that level of fund depletion.
The two key factors which have caused the fall in income drawdown pensions were a Government legislated reduction of 20% in the available maximum income and a fall in gilt yields which are used to set maximum income drawdown.
In order to reduce the hardship being felt by many of those already in income drawdown or approaching retirement AJ Bell is calling on the Government to take two actions:
1. Remove the link between gilt yields and maximum income drawdown calculations and carry out a review into a more appropriate calculation mechanism
Returns from gilt yields have no relevance to the investment portfolio of the majority of drawdown savers. Removing the link between gilt yields and maximum income drawdown calculations will remove one of the variables which drawdown savers must face and so increase certainty of future income.
2. Whilst a more appropriate basis for calculations is being considered, temporarily re-instate the 20% uplift to drawdown calculations
This will immediately reduce the hardship being felt by those currently in drawdown, lessen the negative impact of the fall in gilt yields, and solve the catch-22 situation that those approaching retirement currently face.
Andy Bell
CEO, AJ Bell