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.”
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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.”
Yes. Desperately needed – but will it be implemented in time to save people with drastic review results?
Also – this needs to switch to percentages. We ought to allow funds to deplete in a controlled manner – this is their purpose. Or does the goverment have an interest in stopping us getting to out money and then taking over half of it when we die? It is intended as a provision to be used in later life, not a bonus to governments when we die.
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. The return to 120% of the GAD rate recognises that many prudent savers who have seen their incomes plummet recently have been unfairly treated.
The government will take twice as much from this tax hit on pensions as it will from the increase in the bank levy. That cannot be fair, and will only undermine confidence in pension saving.
The Chancellor is wrong to say that the changes will only affect those at the top of the wage tree. Osborne claims he is taking a carrot away from the rich, but he is also beating many middle class savers with a stick. Middle managers in the public and private sectors will get caught in the net.
People in a final salary pension who have worked loyally for the same employer for years and then get a pay rise, or a promotion, could end up with a tax bill of several thousand pounds. This is a charge just for saving into a pension. The self-employed and those nearing retirement desperately trying to ‘catch up’ by boosting their pension are also at risk.
What we desperately need is stability, so that people can trust the pensions system and get on with saving for their old age, instead of being treated like a cashpoint when things go wrong. This raid also adds an extra layer of admin and cost for the businesses trying to run final salary pensions.
The government is unpicking the benefits of saving into a pension at the same time as it is putting several million people into one. Yet again, workers will see the goal-posts being moved and wonder why they should bother. These are difficult economic times, but the government needs to do much more to encourage people to have faith in saving, and to strengthen workplace pensions.
These reductions further complicate retirement planning for high savers. This is bound to catch out high earners with career breaks and entrepreneurs who may try to fund their retirement after establishing their business.
Another key consequence is that this brings more complexity around fixed, primary and enhanced protection and could signal another round of complicated protection legislation.
Savers affected by this change who have not used all their annual allowance in the previous three tax years may want to consider using this unused relief in that year, a process called carry forward. Savers must have sufficient earnings to obtain tax relief on this amount and must be aware of the effect of the lifetime allowance.