Row over the approach to maximum drawdown limits. Just make sure you know what’s happening to you.

2nd April 2013

With the Government allowing you to take more from your drawdown pot, a row has broken out among pension providers over how to implement the change. One group of providers say that if people have asked for the maximum withdrawal, they will start paying out the new higher sum from the investor’s next review date, unless they are told otherwise. Other pension firms have condemned this as irresponsible.

The change allows people to take the income drawdown plans arguably as much as a fifth more each year. The Government had cut the maximum you could take from your drawdown plan from a 120 per cent of GAD to 100 per cent in 2011. But it recently reversed the decision. Now depending on review dates, people can once again start taking more.

Two pension firms, Skandia and Standard Life have decided that if you asked for the maximum you should receive the maximum GAD. So if you were taking 100 per cent, they will now give you 120 per cent GAD unless you say otherwise. Their stance is reported in trade paper Money Marketing.

Skandia retirement planning manager Adrian Walker told the trade website: “Where a client instructs us to pay the maximum, we will continue to do that until the investor or their adviser instruct us otherwise. So if they have instructed us to pay the maximum under the old rules and at the next review date they do nothing, we will automatically pay them 120 per cent of GAD rather than 100 per cent.

“We have communicated with advisers about this issue. If the client, in discussions with the adviser, decides they do not want us to pay the higher maximum then all we ask for is an instruction to that effect and we will pay a lower amount.”

But not all providers agree and one specialist income drawdown firm Intelligent Pensions has attacked the move as irresponsible because it could deplete investors’ retirement pots.

David Trenner, technical director at Intelligent Pensions says: “Income drawdown should be about sustainable income and drawing what is required to meet expenditure. A carte blanche approach by drawdown providers to increase drawdown income is irresponsible and in many cases will go against a client’s wishes.

“The reduction in maximum GAD from 120 per cent to 100 per cent in 2011 was met with hostility by many in the industry and earlier this year it was agreed the decision was to be reversed.  The recent Budget announced there would be a further review of drawdown to look at how drawdown income should be calculated.”

Trenner added “There are some drawdown investors who need more than 100 per cent GAD income at the moment and the change in GAD maximum will come as a great source of relief. However, if a drawdown investor has set their income at, say, £10,000 per annum because this is what they need why increase it to £12,000 per annum? This will only serve to increase the sustainability risk for drawdown investors and could also have tax implications.

“Taking higher levels of income from drawdown will increase the risk of fund depletion and threaten income sustainability. It would be more prudent for providers to request action be taken for an increase in income rather than the other way around!”

What should you do?

While all these arguments are going on, we think you need to consider what you should be doing and, if necessary, take advice. You may start receiving more income from your pot if you do not inform your provider. We strongly suggest that if you are in the group taking maximum drawdown pay close attention to the policy that has been implemented by your provider. Does this suit your interests? If you have an IFA on retainer, they should be touch some time soon anyway. But maybe it is worth dropping them a note to keep them on their toes. And if for some reason you have lost contact with your adviser, you can find a new one on www.unbiased.co.uk

But the most significant advice must surely be don’t let anything change by default unless you are already happy with the change.

 

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