Labour are calling for a commission to investigate falling retirement incomes.
Plummeting gilt yields have pushed Annuity rates lower and also reduced the maximum level of income available from Income Drawdown plans causing financial hardship to many existing retirees and would be retirees.
Annuity rates comparison
An Annuity rates comparison published recently by Moneyfacts showed that Annuity rates dropped in 2011 by around 8% and that 2011 was the fourth year in a row Annuity rates had fallen.
Whilst lower Annuity rates are a problem for those people nearing retirement, they do not effect existing Annuities already in payment. However, falling gilt yields are causing problems for existing Income Drawdown investors when they reach their next mandatory review.
The Government’s Actuary Department calculate the maximum amount available from an Income Drawdown plan, using factors such as age, gender and the 15 year gilt rate. The upper limit on the available income, often known as maximum GAD, has therefore fallen in line with plummeting gilt yields.
Industry experts have been calling from some time for the problem of falling retirement incomes to be addressed; it now seems as if the Labour party are supporting these calls.
Chris Leslie (left), Labour’s shadow Treasury financial secretary, has said that a government review or commission is needed to explore how those people nearing retirement can be helped.
Mr Leslie said: “The economy is going to be flat for a while, so we need to think of something that will help people hitting retirement. We need a review or commission to properly think up some options.”
However, responding to Mr Leslie a Treasury spokesman rejected the calls for either a review or a commission.
The financial services industry has been concerned for sometime about falling retirement incomes, particularly the case of Income Drawdown which has not only been hit by falling gilt yields but also a government change which saw the maximum income available reduced from 120% of the GAD figure to 100%.
AJ Bell, one of the UK’s largest SIPP providers who offer the popular SIPPcentre SIPP, wrote to Treasury financial secretary, Mark Hoban, last year requesting a review of the Income Drawdown rules.
AJ Bell’s request was rejected by the government amid fears that people would exhaust their fund.
Equalisation of GAD rates
Meanwhile industry experts understand that the government has become working on how male and female GAD rates will be equalised following a European Commission ruling that gender cannot be a factor in deciding the level of income available.
It is hoped that whilst this review is undertaken the government will take the opportunity to carry out a wider review of Income Drawdown to help pensioners who have seen their income shrink due to the perfect storm of falling fund values, lower gilt yields and the government’s decision to reduce the maximum income available from 120% of GAD to 100%.
Andrew Tulley, pensions technical director of MGM Advantage says: “This is as good an opportunity as any for the Treasury to take a look at the whole drawdown process and I think they will come under a lot of pressure from providers to do that.”
Billy Mackay of AJ Bell agrees, saying:“A review of the GAD tables ahead of the implementation of the gender directive seems like a good opportunity to consider reform.”
Leslie on the other hand believes that whilst Income Drawdown reform should be considered the problems presented by lower Annuity rates are more urgent. He said: “The bigger issues are related to longer-term depressed annuity options, problems from Solvency II as they affect annuities and the need to recognise that those waiting for the optimum moment to purchase annuities are finding it increasingly difficult.”