Autumn Statement 2012: The government’s move to increase the capped drawdown limit of pension funds from 100% to 120% has been branded a ‘sellotape measure’ that fails to tackle major issues in the post-retirement market.
In his Autumn Statement today, chancellor George Osborne announced that an individual will be able to draw up to 120% of their retirement savings, to the value of an equivalent single life annuity.
Drawdown is the means by which an individual can withdraw cash from their retirement savings while their pension fund remains invested.
But Henry Tapper, director at First Actuarial, said: “We welcome this easement. Pragmatically, it was the only thing [Osborne] could have done, but the fundamental issue - the damage done by [quantitative easing] QE2 to [annuity] rates - hasn’t been addressed. It is a sellotape measure, which sticks together the post-retirement mess.”
Annuity rates are based on gilt yields. Quantitative easing reduces the number of gilts on the market, boosting the cost of remaining gilts, which results in lower gilt yields and, therefore, lower annuity income.
Tapper believes that this predicament is reducing retirement funding choices for retirees. “This is not a good time to buy annuities – people are having to rely on drawdown,” he explained. “They may not like it, but the 100% restriction was really strangling their lifestyles.”
But he added that an over-reliance on drawdown could lead to individuals depleting their funds early on in their retirement. Nevertheless, he said: “I think it’s about, politically speaking, rights. It does at least give people something at a time when their option to annuities isn’t there.”
Tom Stevenson, investment director at Fidelity Worldwide Investment, agreed: “We congratulate the government on its willingness to back-pedal on the unhelpful reduction in the income pensioners can enjoy in flexible draw-down arrangements.”
