Government plans reform of pension income rules

gadgetmind

"The government is debating whether to relax limits to the amount of income pensioners can draw down from their savings"

http://citywire.co.uk/money/government-plans-reform-of-pension-income-rules/a633587

Let's hope something happens, and ideally something along the lines of what AJ Bell have proposed.

http://www.ajbell.co.uk/downloadfiles/Press_Release_Oct12_AJ_Bell_proposes_new_drawdown_regime.pdf

Daniel_Elkington

AJ Bell have some OK ideas.

The whole pensions industry needs simplifying again and I think that it needs opening up to a degree. No stakeholder rubbish or NEST or personal accounts or whatever - just every individual has their own personal pension account which they can make the employer pay into - it's not that difficult for an employer to set up two standing orders on employment - one into their bank account for pay and one into their pension.

It has been argued that this increases cost and complexity, but it really doesn't - it's just another system that deducts a percentage of salary and pays it into a personal account - just like PAYE deducts a percentage of salary and pays it into an HMRC account.

Unfortunately the costs of 'making it easier' is reduced flexibility for individual investors and increased compliance for those wanting to do something different.

Drawdown is a mess. We have to assume that people want a good standard of living and will not destroy their pension.

The problem, again, comes down to education in schools, people in this country have no education as to what the financial system is, they don't believe in insurance, they do not save for retirement adequately.

Hopefully the state will make a move towards sorting out the results of the 2010/11 finance bill, however I'm not confidant of a positive step - more another few hundred pages of addendum to the already stupidly lengthy legislation that exists.

TheSandman

Agreed Daniel,


When the government decided that all employers must pay in I thought the same as you;

At work your employer pays 90% of your salary in to your bank acount and 10% in to your pension account through BACS.

You don't burden employers with NEST or auto enrolment and you don't have to waste taxes on expensive tv campaigns, leaflets and helplines to explain whatever the latest scheme is (SERPS S2P NEST etc)

Employees will have to choose from the funds offered by their pension company but that's what a lot of employees have to do at the moment if they have a DC scheme or are making AVCs. If they've never chosen an investment before a half hour chat with the pension company or IFA and you can plump for a bog standard 'balanced' or 'lifestyle' fund.

System

It seems obvious to me - drawdown should be limited only by the income generated by the fund.

gadgetmind

Clifford_Pope wrote: »

drawdown should be limited only by the income generated by the fund.

Leaving the capital plus growth to be taxed at 55% when you die. No thanks.

Daniel_Elkington

Drawdown is a silly option really, always has been. People buy it thinking that it gives them 'control' when it really doesn't.

It's very simple, those appropriate for drawdown really have about 400K+ in their pot. At this level it is just as expensive to set up your own scheme and take a scheme pension, where the death benefits are significantly better.

Drawdown is only really any good because it has allowed these third way products, which I like, they are something different and allow people a little bit more flexibility than with an investment linked annuity, but similar gains.

gadgetmind

Under current rules, I am struggling to see how I can make Capped Drawdown work effectively for me as I'd have unused basic rate band pre-state pension and then higher rate afterwards unless I dropped my drawdown to a figure that would mean my funds would last "forever".

The other option I've modeled is annuitising enough to go flexible and then giving my SIPP a right good talking to for 12 years while still remaining at basic rate.

However, this is all five years out, so the job now is to keep on accumulating and hope they don't make too much of a mess of the rules in the mean time.

Aegis

gadgetmind wrote: »

Under current rules, I am struggling to see how I can make Capped Drawdown work effectively for me as I'd have unused basic rate band pre-state pension and then higher rate afterwards unless I dropped my drawdown to a figure that would mean my funds would last "forever".

The other option I've modeled is annuitising enough to go flexible and then giving my SIPP a right good talking to for 12 years while still remaining at basic rate.

However, this is all five years out, so the job now is to keep on accumulating and hope they don't make too much of a mess of the rules in the mean time.

Capped drawdown certainly has its disadvantages at the moment, one of which is as you have just highlighted. With any luck the changes being considered at the moment will increase your pension income allowance somewhat, which might mean you get around the problem of the cap, but my money is on the government making things more complicated and not much better with their tinkering.

Hopefully they'll listen to some of the ideas being put forward by various pension providers who have actually considered the situation and come up with a number of ideas. It's unlikely this will simplify matters in terms of administration, but there are a number of ideas that will preserve a core pension income through life while allowing access to more income from the fund periodically (a little like flexible drawdown but based on the size of the inflexible residual income rather than a fixed income for life).

We shall see!

dunstonh

I take a different view to Daniel. I like drawdown but prefer it using conventional investments. The third way products tend to be expensive and whilst they can offer some downside protection, the potential for upside is severely limited because of the costs of guarantees/protections. So, you have to measure that against whether lower cost, less volatile conventional investments would have been more suitable.

investing is all about opinion and drawdown facilitates investing. So, you would expect differences in opinions. There is rarely any right or wrong in these things. Just opinion.

Aegis

dunstonh wrote: »

I take a different view to Daniel. I like drawdown but prefer it using conventional investments. The third way products tend to be expensive and whilst they can offer some downside protection, the potential for upside is severely limited because of the costs of guarantees/protections. So, you have to measure that against whether lower cost, less volatile conventional investments would have been more suitable.

investing is all about opinion and drawdown facilitates investing. So, you would expect differences in opinions. There is rarely any right or wrong in these things. Just opinion.

Agreed - I've looked at a few products with guarantees and they end up looking horrendously expensive in comparison to a standard investment portfolio, often with guarantees that only kick in after 10 years if you want anything other than the most cautious options (i.e. when the guarantees are actually most useful).

jamesd

AJ Bell should be ashamed of themselves for presenting such a horrendous proposal and claiming that it's an improvement.

gadgetmind wrote: »

Let's hope something happens, and ideally something along the lines of what AJ Bell have proposed.

http://www.ajbell.co.uk/downloadfiles/Press_Release_Oct12_AJ_Bell_proposes_new_drawdown_regime.pdf

I'll hope not! That'll embed the current low payouts into the system even after gilt yields return to more normal levels, locking in the current mess.

What AJ Bell did was miss out a key number to make their proposal look good: the amount the current rules would provide if gilt yields returned to their more normal 4.5-5% range after QE and the Eurozone crisis ends. At a 2.5 gilt yield a 55 year old with £100,000 in drawdown can take out £4,400. At a 4.5% gilt yield that would instead be £5800. AJ Bell proposes that it be set to £5,000 for those with less than £200,000 in drawdown.

That's locking in a poor deal for those using income drawdown.

AJ Bell also seems to be making some amusing assumptions about how much income is needed in retirement. That £200,000 pension pot value at their proposed 5% at age 55 level means £10,000 of income. At 69 they have it at £12,000. Add around £10,000 in state pensions and that ends up at around £22,000 of income, getting close to twice the amount I actually need to live on.

Lat time I checked median pensioner income was around £18,000 a year. AJ Bell seems to think that more than that is required even for those who can live comfortably on perhaps £10,000 a year. Halving their £200,000 level would make more sense but it really needs to be based on the whole circumstances of an individual. Like in my case, where it's likely that close to half of my non state pension income will come from non-pension sources.

But I do have a need to draw out at a higher rate before the state pensions start, because those are a high percentage of the money I need to live on.

What has happened is that this government in eliminating the multiplier has caused me to regret having made a large basic rate pension contribution a few years ago. I would not do the same today after their change. I would not do the same under the AJ Bell proposal either, because that's just more of the same worse deal.

To satisfy me at a basic level it's pretty easy: go back to the 2007 rules. To make me more happy, add in a floor at 6% that it never falls below whatever the gilt yield, because I don't have to invest in gilts - and won't. I will invest in bonds and equities anywhere in the world.

At the moment around half of my retirement income contributions are not going into pensions at all. they are going into other tax wrappers like ISA. Because that lets me draw out at a higher rate before the state pensions start and for contingency inability to work that forces retirement before age 55. To get me to put that money into a pension I have to be able to draw at a rate that meets my income needs. The AJ Bell proposals don't. Nor do the current or 2007 rules.

The AJ Bell proposal is a particularly horrendous deal for the older retirees. They propose 8% at 80-89 and 9% above that. At a 4.5% gilt yield the current rules provide for 15.8%. A massive decrease in potential income. Even at a 2.5% gilt yield the rate under current rules is 14.3%, a good deal more than even the highest 10% that AJ Bell proposes.

So no, I think the AJ Bell proposal is a horrible idea that locks in much of the current bad result caused by QE and the Eurozone crisis combined with eliminating the 1.2 times multiplier.

What I'd really love to see is a government actually trusting that I've been dedicating a large part of my income to retirement planning and assuming that I'm going to be similarly responsible when it comes to taking the money out as I have been when putting it in.