GOVERNMENT POLICY DEALS CRIPPLING BLOW TO PENSIONS

Monday 10 September 2012

OVER 300,000 FACING ANNUAL INCOME SLASHED BY MORE THAN A THIRD INCOME DRAWDOWN RULES PENALISE THE LESS HEALTHY AND LESS WEALTHY

GOVERNMENT POLICY DEALS CRIPPLING BLOW TO PENSIONS

The Bank of England and Treasury have jointly slashed the private pension income of many retired people by more than a third.

These cuts mean someone wanting the same income as they could have taken from a £100,000 pension fund in August 2009 would now need an additional £40,000 - £50,000 to make up the shortfall.

Dr Ros Altmann, Director General of Saga, says “The Bank of England recently suggested that rising asset prices have offset falls in annuity values so that pension incomes are unaffected. This is certainly not the case. And for those in Income Drawdown, the impact has left many retirees facing a catastrophic fall in pension.

Over 325,000 people with capped Income Drawdown plans have suffered from the negative impact of QE on gilt yields plus Government rule changes. Those in poorer health have been particularly penalised, as no special provision is made within the new rules for their shorter life expectancy. 

Dr. Altmann says “These people seem to have no escape from QEs clutches.  They have done the right thing by saving for their retirement, but are being forbidden from spending their own money.  Those who are less healthy and less wealthy are being particularly penalised.”

The wealthiest pensioners, who can use flexible drawdown, are unaffected, as they can take out as much money as they like.

Income Drawdown has been popular with pension savers who do not want to be locked into an annuity which offers no prospect of future capital growth. Industry experts estimate there is around £20billion invested in these funds.

The Government limits the income people can take out of their fund each year, with the maximum amount being set by the Government Actuary Department (GAD), based on the income that would be paid by a standard annuity.  This is, therefore, linked to changes in 15-year gilt yields, which have declined sharply following QE. GAD rate has fallen from 4% in August 2009, to 2% in August 2012, causing a dramatic decline in annual income for drawdown investors.

On top of that, Treasury rule changes have further reduced drawdown incomes. From April 2011, the maximum amount that can be withdrawn each year was cut from 120% of the GAD rate to just 100%.

 The triple whammy of falling gilt yields, reduced GAD rate and lower drawdown cap has left many middle class pensioners facing cuts of more than a third in their drawdown income or more if the funds they invested in performed poorly. Since August 2009, maximum income that can be taken has fallen by around a third.

The Table shows the impact of these combined changes on a £100,000 pension fund in the past three years. 

For example, the maximum annual income a 65-year-old man could draw from a £100,000 capped drawdown pension fund has fallen from £7920 in August 2009, to £5,300 last month and for a 65-year old woman has reduced from £7,440 to £4,900 last month.

  

 

Male – by age

Female – by age

 

65

70

75

65

70

75

August 2009

£7,920

£9,000

£10,800

£7,440

£8,520

£9,960

August 2012 (GAD rate reduced to 2.0%)

£5,300

£6,200

£7,700

£4,900

£5,800

£7,000

% change in maximum drawdown

-33.1%

-31.1%

-28.7%

-34.1%

-31.9%

-29.7%

Increase in value of pension fund required to maintain August 2009 income

£49,434

£45,161

£40,260

£51,837

£46,897

£42,286

 

These changes for capped income drawdown particularly penalise pensioners in ill health - and also mean lower tax revenue for the Treasury, as the income and spending power of this group are cut.

Dr Altmann says: ‘’The effects are particularly harsh on those in worse health. In the annuity market, they would be able to get an enhanced or “impaired life” rate –- to reflect their shorter life expectancy. But with Income Drawdown, the GAD rate is based on the income paid by a standard annuity, which is much less.  Many people do not want to actually buy an annuity because it means giving all their pension assets to an insurance company and they would rather keep their money invested instead.  But the cards have been stacked against them.’’

Such problems have further undermined confidence and trust in pensions.  Saga has been inundated with letters and emails from distraught and angry pensioners who have saved hard and expected their pension savings to support their retirement lifestyle.  Now, despite having become used to a particular level of pension for the past few years and still having plenty of money in their fund, the government will not allow them to get their hands on it.

 “The Treasury must think again about these injustices, especially the lack of provision for poor health,” says Dr Altmann.  I hope the government will urgently reconsider its policy on this issue.”

ENDS

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