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Drawdown rules contribute to massive pensions cut

Monday 23rd January 2012

SIPP provider A J Bell is pressing the Government to act as new rules on income drawdown combined with near record low gilt yields have led to a 32% cut in retirement income for many pensioners.

The maximum income available from drawdown is calculated using tables prepared by the Government Actuary's Department.  In recent years the maximum has been based on 120% of a comparable annuity - which in turn is based on gilt rates. But in April last year the upper limit changed to 100% and since then gilt rates have fallen drastically.

A year ago they were 4.00%. On Friday they fell to 2.25%. For those approaching retirement this year - or whose drawdown terms are up for three yearly revision - the combination of falling gilt yields and the new lower percentage limit will mean a reduction of several thousand pounds in their annual pension income.

A J Bell said a 65-year-old male with a pension pot of £250,000 going into drawdown in February 2012 will have a maximum drawdown of £13,750 - in February 2011 the figure would have been £20,400 - a reduction of 32%.

Marketing Director Billy Mackay said: "The Government wants to protect those who opt for drawdown instead of annuities from exhausting their pension pots but we've seen little evidence to suggest this is happening.

"The fall in gilt rates has had a drastic effect on drawdown rates and threatens to pose real and unnecessary hardship to many people who may feel justifiably agrieved that they can't access the money they worked so hard to save.

"The Government has said it won't allow GAD rates to drop below 2% but you have to question whether this is enough. It needs to fundamentally question the logic of linking drawdown income rates to gilts and instead look at fixed income factors linked to the client's age.  While it consults on a more appropriate measure it should also consider restoring the 120% factor in the maximum income calculation."

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Mike Jones

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