Government plans reform of pension income rules

kidmugsy

"We have to assume that people want a good standard of living and will not destroy their pension." The evidence is against that assumption. We used to live in Australia which was plagued by "double dipping" i.e. people exhausting their superannuation (as it was called there) and then throwing themselves as a charge on the welfare state. Eventually the rules were changed to put a stop to it.

jamesd

If a government wants a simple proposal, just recognise that those in drawdown don't use gilts and in practice can obtain 4.5-6% total return without undue difficulty using a range of domestic and international investments. Add in some ability to draw on capital as well as income and perhaps 8% might be a useful floor for the drawdown percentage.

jamesd

Daniel_Elkington wrote: »

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

I made no significant pension contributions until the drawdown rules were introduced. For anyone who wants to promote use of pensions for retirement planning that might be interesting, though it's in part due to chances in my own circumstances.

I would not be making significant pension contributions today if I was going to be forced to buy an annuity. Even though I'm highly dedicated to retirement planning to the point that for years I've been using at least 60% of my (net pay plus gross pension contributions) for it.

Daniel_Elkington wrote: »

It's very simple, those appropriate for drawdown really have about 400K+ in their pot.

Taking just 5% income from that gets you to £20,000 income from the pension plus another £10,000 or so from the state pensions plus whatever other investment income you have. With a median pensioner income of around £18,000 I sincerely hope that at least half of pensioners also can do quite nicely on way less than £30,000. You're suggesting a drawdown threshold at which it's possible for people to lose two thirds of their pension pot and still be on almost the median pensioner income, before any allowance is made for other income.

Now, I'm not sure about your thoughts on risk tolerance but I don't think it's necessary to require a pot so large that someone can lose two thirds of it and still live nicely.

The sensible criteria isn't just the total pension pot size, it's what portion fo total mandatory spending is represented by that pension pot. If someone has other income of £10,000 and needs just £12,000 to live on, drawdown with even a 5% income level and assumption of 50% bad result capital loss would take a pot size of only £80,000. Less than that if there was other non-pension income available.

Daniel_Elkington wrote: »

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.

Scheme pensions can be quite interesting, particularly for those who are interested in drawdown and who have a medical condition that reduces life expectancy. The current capped drawdown rules are particularly onerous for such people.

Old_Slaphead

jamesd wrote: »

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.

Apologies if this is a naive observation but couldn't you just annuitise the drawdown funds once/if the rates became more favourable to annuities (as in above example).

jamesd

Yes, you can do that. For all or some of the pot. It can be quite a good idea to gradually buy annuities as you get older and reach the ages at which the cross-subsidy from those who die early to those who live longer becomes significant. That's somewhere above age 75 today, when life expectancies at 65 are for half to live to 88 or older.

You can also just buy a level annuity then use Flexible Drawdown (provided you haven't used a scheme pension first). A male with Daniel's £400,000 pot could spend £170,000 to buy a single life level annuity of £10,000 to top up say £10,000 in state pensions, then use Flexible Drawdown instead of a scheme pension for the rest. If they have the time they could defer the state pensions for a while and let the 10.4% annual increases get them closer to the £20,000 Flexible Drawdown requirement with less capital cost.

System

gadgetmind wrote: »

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

That's a separate argument. The unfairness at present is that even a fund generating a healthy income is limited in what it can pay out by the low GAD rate.

My property SIPP is earning 8%. If I started drawdown I would not be allowed to draw the full income, or even a reasonable 5%. Why? Even if I stripped all the income I couldn't deplete the pot except by selling the premises.

gadgetmind

Clifford_Pope wrote: »

Even if I stripped all the income I couldn't deplete the pot except by selling the premises.

But what about someone with a more balanced portfolio that generates 3.5% of income PA but also has capital growth? Should they be limited to 3.5%?

System

gadgetmind wrote: »

Should they be limited to 3.5%?

No. The definition of "income" for the purposes of assessing a reasonable sustainable rate of drawdown should include growth of the fund from all sources. The unfairness at present is that it is a uniform restriction that applies to all funds regardless of performance.

jamesd

Old_Slaphead wrote: »

Apologies if this is a naive observation but couldn't you just annuitise the drawdown funds once/if the rates became more favourable to annuities (as in above example).

I should expand on this a little. Most people can do that. But income drawdown was originally introduced for those who have a religious ban on speculating on life and consequently are barred from buying an annuity.

gadgetmind

jamesd wrote: »

income drawdown was originally introduced for those who have a religious ban on speculating on life

I guess we can at least take a little cheer from the fact that they're now suffering for their stupidity!