October 13, 2011 4:34 pm

Government urged to act over drawdown

The government is being urged to take immediate action to ease the difficulties facing hundreds of thousands of people in retirement, as providers warn that investors face dramatic income drops of up to 50 per cent this year.

Some of the country’s largest pension providers are leading calls for the government to reverse its recent decision to reduce income limits for retirees who kept their pension pot invested in the stockmarket, or “capped drawdown”, rather than buy an annuity.

The reforms, which came into effect in April, saw pension income limits for drawdown investors fall from 120 per cent to 100 per cent of an equivalent annuity.

The measure was designed to reduce the risk of investors running down their funds and becoming reliant on the state, after rules requiring people to buy an annuity at age 75 were scrapped.

But the timing has been poor for the estimated hundreds of thousands of investors who are due to have their drawdown income limits reset as part of a regular review.

The income squeeze has been compounded by market volatility, which has hit fund values. But sharp falls in gilt yields, used to set drawdown limits, have also depressed income prospects.

“Some investors are seeing falls of up 30-50 per cent,” says John Lawson, head of pensions policy, with Standard Life. “The cuts amount to thousands of pounds less income a year.”

“The Treasury should consider whether there is leeway during strange economic times, such as these, where gilt yields are artificially low, to disapply policy for a certain period.”

The government this week said it recognised its measures “will affect the incomes of individuals who are currently in drawdown arrangements in the short term, but believes that they will benefit individuals in the long term”. It has no plans “at this time” to review its rules.

Pension provider, AJ Bell, also recently wrote to the government urging it to immediately re-instate the 120 per cent income limit.

In a poll of 500 drawdown investors and advisers by AJ Bell, one in four said the government should break the link between gilt yields and drawdown calculations. Nearly a third of respondents said the 120 per cent income limit should be immediately reinstated.

“These results back my view that the government are failing to appreciate the strength and depth of feeling on the matter,” said Andy Bell, chief executive officer of AJ Bell.

“I can understand why the government is keen to protect individuals from the risk of depleting their pension fund but protection for the sake of protection is madness, particularly when it creates financial hardship.”

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