Understanding private pension rules

jamesd

Because they can and they view it as their money, not yours, they have a very high minimum income target and they don't seem to think it's worth helping people who have already demonstrated prudent financial planning to provide a level income during the years before and after the state pensions start.

A term annuity would be one way to ensure that there's sufficient guaranteed income until the state or other pensions start. Not an acceptable vehicle, though.

The least bad workaround is drawdown and lump sums as soon as you hit 55, then investing the lump sum outside a pension. Then invest or recycle the income. If there's already plenty of capital, it might be worth recycling the lump sum as well, subject to the restrictions on that.

gadgetmind

jamesd wrote: »

Personally I'll be starting on this reduction of legislative and other risks risk the moment I hit 55. Though maybe making additional pension contributions as well after that date.

I won't be making any more contributions 'cos I'll probably be knocking regular work on the head at that point!

It's still probably worth doing the basic £2880 for my wife (when will they raise this with CPI!) but I'll be switching to "just give us the f'ing money!" mode with my pension.

gadgetmind

jamesd wrote: »

A term annuity would be one way to ensure that there's sufficient guaranteed income until the state or other pensions start. Not an acceptable vehicle, though.

No, and neither are purchased life annuities. Where's the sense in that?

The least bad workaround is drawdown and lump sums as soon as you hit 55, then investing the lump sum outside a pension.

Already in the plan.

Then invest or recycle the income. If there's already plenty of capital, it might be worth recycling the lump sum as well, subject to the restrictions on that.

Only an option if they raise the annual allowance, but that also seems to be heading in the wrong direction.

dunstonh

So they should. It's likely to be the best idea for most people, who can simply move the money into a S&S ISA, leave it invested and gain protection from some of the legislative risk that has contributed to the current problem.

Clearly the letter from the person in the paper who is complaining about their income dropping so much would indicate it isnt a good idea for most people.

120% allowed the fund to erode quicker and if you are taking income that is greater than the growth of the fund at such a high rate then you are doing to erode the fund too quickly.

if you have the financial knowledge and understanding to utilise options for the best then it is fair enough. However, in this case, that was not happening. They were taking 120% to live on and that is a problem.

gadgetmind

dunstonh wrote: »

if you have the financial knowledge and understanding to utilise options for the best then it is fair enough. However, in this case, that was not happening. They were taking 120% to live on and that is a problem.

It depends on whether they were taking an unsustainable amount given their age, and how long they were planning to take that amount.

You can't just say that "120% of GAD is too much" because it depends on *many* other factors.

Other than it introducing tax inefficiencies for me, I can still steer a route through these icebergs, but I also hope that HMG have moved away from using gilt yields and/or said yields have improved by the time I'm hitting drawdown.

Of course, HMG have something of a reputation of making personal pensions worse year-on-year, so a move to 80% GAD or 50% GAD should not be ruled out.

dunstonh

It depends on whether they were taking an unsustainable amount given their age, and how long they were planning to take that amount.

You can't just say that "120% of GAD is too much" because it depends on *many* other factors.

You can say that. They were taking 120% to fund a lifestyle. That is very high risk and it is recognised by regulator and the FOS as being high risk.

gadgetmind

dunstonh wrote: »

You can say that.

But only in *some* cases.

They were taking 120% to fund a lifestyle. That is very high risk and it is recognised by regulator and the FOS as being high risk.

That's no reason to get all nanny state and introduce swingeing regulations that mess it up for the majority.

This is an area where I hope and expect to see some frantic back-pedalling and/or introduction of some banding, perhaps based on size of remaining pot.

dunstonh

That's no reason to get all nanny state and introduce swingeing regulations that mess it up for the majority.

In most cases I would totally agree with that. The problem is that society is more prone to complaining and very often the complaints still come in even when the choice was theirs. You just have to look at the claims forums on this site as an example. If you take a risk and it doesnt pay off but you knew about the risk then it should be your fault. However, nowadays you get people putting in complaints, often using claims companies, in an attempt to get compensation.

Drawdown has always been considered a high risk transaction. I am not convinced it is as high risk as the FSA/FOS position it. If you can draw income from your ISAs and other tax wrappers whilst being invested then what is it about doing the same from pension that makes it higher risk than the others? The answer to that would no doubt be that for MOST people, they are reliant on their main income source and cannot afford fluctuations.

The FOS generally take the view that an individual is cautious unless proven otherwise. That means that the default position puts them under the risk profile suitable for drawdown. It would be expected that someone with a low IQ (to put it bluntly) would not be suited for drawdown or any contract that is more complicated.

You have to remember that the average person is clueless and a good proportion go looking to blame someone else for their mistakes. The fact this person wrote to a newspaper about this tells us what their level of knowledge was about a high risk transaction they entered into.

gadgetmind

dunstonh wrote: »

It would be expected that someone with a low IQ (to put it bluntly) would not be suited for drawdown or any contract that is more complicated.

So why do we have people in drawdown who don't seem to understand the nature of the beast?

The fact this person wrote to a newspaper about this tells us what their level of knowledge was about a high risk transaction they entered into.

Perhaps because while investment risk can be understood, people didn't appreciate the double-whammy inherent in our drawdown rules. If/when equities drop in value, gilts will rise, hence GAD rates will drop. And then come the third blow in the shape of our nanny state, with new rules that no amount of back-testing and modelling could allow for.

Even with all of these gotchas, and well-meaning but ill-considered regulations, I'm still planning to use drawdown, but it will only be half of our income.

jamesd

jamesd wrote: »

So they should. It's likely to be the best idea for most people, who can simply move the money into a S&S ISA, leave it invested and gain protection from some of the legislative risk that has contributed to the current problem.

dunstonh wrote: »

Clearly the letter from the person in the paper who is complaining about their income dropping so much would indicate it isnt a good idea for most people.

The person in the paper doesn't seem to have been doing that. No sign at all that the money beyond a sustainable level was being invested elsewhere.

If this post elsewhere is the right one, it's from a letter in the Mail on 9 March, which the post summarised as 'a pension of £380 a month ... with the state pension made life acceptable, that is until this governments change in the "Government's Actuary's Rate", he now says he can only draw a maximum of £180 per month ... he says he will now either have get a part-time job or move home'.

That suggests that he didn't have reserves, was spending all of the money and was a poor candidate for drawdown, using it to get an unsustainable income level. Which could have been worked but for the legislative risk that materialised with the change from 120% to 100% of GAD and the choice of a poor income benchmark for pension pots, the 15 year gilt yield, and what QE did to it.

dunstonh wrote: »

120% allowed the fund to erode quicker and if you are taking income that is greater than the growth of the fund at such a high rate then you are doing to erode the fund too quickly.

Reducing the part of assets inside the pension wrapper is a different thing from spending all of your resources too quickly. My intent to move money out of a pension as fast as permitted doesn't mean I'll be spending at an unsustainable rate, just that I'm choosing to take money from the pension to avoid taking it from non-pension sources that are more flexible and less subject to the legislative risks that this case partly illustrates.

dunstonh wrote: »

if you have the financial knowledge and understanding to utilise options for the best then it is fair enough. However, in this case, that was not happening. They were taking 120% to live on and that is a problem.

I agree, if it was 120% of total financial resources (not just to move money from pension to outside pension) and without adequate reserves and sufficient income, that's a problem and not a prudent use of drawdown.

It seems to have allowed avoiding benefits and possibly kept a possibly long term unsustainable lifestyle going for longer than might otherwise have been possible. The possibly words are there because I don't know if the lifestyle would have been long term affordable without the volatility of gilt rates and the legislative risk that materialised. I do know that I'm not keen on a reduction of income of £2400 a year being enough to break the planning in a short time. That implies to me that the move of home may have been a prudent move much earlier in the process to release capital and reduce spending, assuming that it could do that. Savings seem way less than the two or three years of spending that I'd personally want to see in accessible savings to smooth income for someone using drawdown.