The changes wrought by the current Government to the Income Drawdown regulations, i.e. the restriction of the level of drawdown to 100% of the Government Actuarial Department annuity rates rather than the 120% that it was previously, has seriously affected the at-retirement market. The effect of this change has been to sharply reduce the amount of drawdown products currently being sold; Income Drawdown products have slumped in 2011 to 60% of the level they were in 2010.
The pity of it is that Income Drawdown can often be a more suitable product than standard annuities for many pensioners. The fact that annuity rates are so low means that there is a strong argument for deferring annuity purchase until a later date, particularly as the stock market may well be in for a rise due to the flood of auto-enrolled pension money that will increase the demand for equities over the next decade, thus pushing up prices.
Rising stock market values could boost drawdown investments, allowing pensioners to drawdown just the gains and retain the capital for a later annuity purchase when annuity rates have risen, an occurrence which may come when the Bank of England finally finishes its quantitative easing programme and begins to unwind it.
In the meantime, by reducing the amounts that can be taken from Income Drawdown products, the government is stifling product innovation. Why would providers invest money in the Income Drawdown product line when the market is shrinking?
The primary reason given for the restriction of income drawdown rates to the 100% level is that the government wishes to prevent pension pots becoming exhausted. But given that the average pension pot in the UK will deliver an annual pension in retirement of £5,700 per annum, most pensioners will not be capable of surviving without some government subsidy on top of the regular state pension.
Does it matter whether that subsidy is given in the form of a constant trickle throughout a person’s retirement or none is given for the first few years and then a higher amount is given later? Either way, the taxpayer has to support the pensioner.
If pension pots are given a chance to grow during retirement, then there is an chance for the markets to come to the rescue of the pensioner by allowing the pots to grow in retirement and therefore providing a higher benefit to the retiree, delaying the point at which the taxpayer must step in or perhaps preventing it completely.
Income Drawdown is a far better solution than an annuity for almost all retirees. The government must seriously consider changing the rules back to make the product more attractive to the 1.6 million workers who will be hitting the retirement age over the next two years.
What do you think? Let us know in the comments below!
— Andy Leggett (@sipphound) October 9, 2012