Pension drop story...

wymondham

Sorry, I know this is a Daily Mail link, but I just wanted to ask those in the know if this story contains any truth, and if so your feelings on what people can do to protect themselves?

http://www.dailymail.co.uk/money/pensions/article-2127875/We-saved-years-Now-pension-slashed-60-cent.html

I'm paying a fair whack into my pension at present and these stories make me rather nervous that it may be in vein??

rpc

He chose income drawdown instead of taking an annuity. What happened is a well known risk of capped drawdown.

You can argue against the rules of capped drawdown, but what has happened is that he has taken a certain risk and is now complaining when that risk has gone against him.

It's also worth noting that his pension pot has not lost anything, the change is in the amount of income he is permitted to draw. His pot could well be increasing with the current low GAD limits.

Paul_Herring

wymondham wrote: »

Sorry, I know this is a Daily Mail link, but I just wanted to ask those in the know if this story contains any truth, and if so your feelings on what people can do to protect themselves?

Only in that the Daily Mail is partaking in it's usual hyperbole.

The people affected are those using drawdown - which is where you're permitted to take a certain percentage of your pension fund, while leaving the fund largely intact, (as opposed to the more usual 'purchase an annuity' route.)

With capped drawdown, you're limited as to how much you're permitted to withdraw, and is around the amount you'd get had you bought an annuity, and that percentage is reviewed every few years.

What's happened is due to various factors (the Government's QE programme among them,) the percentage has dropped substantially recently resulting in those on drawdown having the monetary amount they may withdraw being reduced.

The fund behind those withdrawals is unaffected by this, but may be affected by falls in the stock-market (presuming the funds are still invested in stocks and shares.)

dunstonh

I'm paying a fair whack into my pension at present and these stories make me rather nervous that it may be in vein??

Can only concur with above. The article is scaremongering and is very selective in its presentation of facts.

The first thing to be aware with unsecured pension income (to give it the correct name. Drawdown is the old name) is that the income can and will change at each review. If you want a guaranteed income you use the secure pension income option

The reason it happened was that the person took the maximum possible under the rules that were in place at the time. That is not often a good idea as you know the income is variable and if you take the maximum then you are likely to be eroding your pension value and be very reliant on investment returns. The Govt decided it didnt want people to have the ability to erode their pension as much and reduced the 120% rates to 100%. So, that accounts for a chunk of the drop. Most sensible people wouldnt have gone above 100% anyway (caveat: there are times when it could be worth it). Interest rates fell and gilt yields with it so the calculation on the maximum you can take is based on gilt yields. So, that brought the maximum down as well.

Income drawdown/unsecured pension income is a high risk transaction in the eyes of the FSA. The person in the article is an ex financial adviser. So, he would know this. One of the typical risk warnings you get with drawdown is that the income is variable and can drop. Risk warnings exist because they can happen. So, you cannot complain about it when a risk you knew could happen then goes on to happen.

if you live in flood plain, sooner or later you are going to be flooded. It may be once in 200 years or it could be twice in 5 years and then another 150 years to the next one. You dont know when or how frequent. You just know it could happen and at some point it will happen. You may get lucky. You may be unlucky. If you dont like the risks then dont buy the property. Same applies to drawdown. if you dont like the risks, dont buy that option.

Rob_192

The thing I find most worrying is all those stupid comments at the bottom of the article! There are some seriously deluded people around. The trouble is, this sort of article is going to be the only financial education many will get and just adds fuel to that "pensions are all cr*p" attitude which so many people seem to have. Pretty irresponsible journalism really.

R

RichandJ

Rob_192 wrote: »

The thing I find most worrying is all those stupid comments at the bottom of the article! There are some seriously deluded people around. The trouble is, this sort of article is going to be the only financial education many will get and just adds fuel to that "pensions are all cr*p" attitude which so many people seem to have. Pretty irresponsible journalism really.

R

Oh dear me, it is drivel isn't it.

Should there be a comma between irresponsible and journalism ?

dunstonh

Rob_192 wrote: »

The thing I find most worrying is all those stupid comments at the bottom of the article! There are some seriously deluded people around. The trouble is, this sort of article is going to be the only financial education many will get and just adds fuel to that "pensions are all cr*p" attitude which so many people seem to have. Pretty irresponsible journalism really.

R

I have mentioned it before but in financial services it is common to describe someone who thinks they have a bit of knowledge but are way off the mark (and often too stubborn to realise it) as a Daily Mail reader.

Every paper of course, has it's reputation but the Mail seems to be focused on celebrities in underwear and scaremongering White Van Man.

System

I have a SIPP invested in commercial property, the rental value of which currently exceeds the GAD limit which would be placed on an annuity purchased with the property's proceeds if sold.
So am I right that if I were to retire now I would not be allowed to take the full value of the rental income in drawdown?

I understand the reasoning where a fund might be jeopardised by excessive drawdown, undermining its long-term viability, but that argument doesn't apply to property, surely? The property will still be there regardless of how much income is taken out in rent?

Or am I misunderstanding how the GAD limit works?

Paul_Herring

Clifford_Pope wrote: »

I understand the reasoning where a fund might be jeopardised by excessive drawdown, undermining its long-term viability, but that argument doesn't apply to property, surely? The property will still be there regardless of how much income is taken out in rent?

What happens if the rental value of the property drops? What happens if you have a few months/years of being unable to rent it out? Where would the money you're withdrawing come from?

System

Paul_Herring wrote: »

What happens if the rental value of the property drops? What happens if you have a few months/years of being unable to rent it out? Where would the money you're withdrawing come from?

Obviously I would have to re-think how much I could draw. There might as you say be a bad year when my income dropped.
But I could never take more than the rental income, so the basic asset would remain intact. It's not like a comparable case invested in shares, where perhaps shares might be sold to bolster a falling yield. I can't sell off bits of the building to compensate for falling rent.

So you are confirming my understanding of how the GAD limit would apply?

Paul_Herring

Clifford_Pope wrote: »

So you are confirming my understanding of how the GAD limit would apply?

Neither confirming or denying (though I suspect you're right) - I don't know enough to answer that question - DH might be along again soon to answer it.