I’d like to share with you the extraordinary tale of two 60-year-old retirees, born on the exact same day. They are both in capped drawdown and they have both just received notification of their new income limits. Neither is happy.
Adam is a charmer and a gambler, a thrill-seeker and an inveterate spendthrift. He lives in a one-bedroom apartment – rented, of course. To him, ISA might be the name of the young lady he met at a wine bar last week – but he can’t really remember. No one knows how he ended up with a pension fund that’s just been valued at £200k, not even Adam. His only other assets are his good looks, an iron constitution and a rather flashy motorbike. Adam’s not happy that can only take £9,200 p.a. taxable income from his SIPP – how’s he supposed to live on that?
Eve is charming too and, like Adam, she has taken many risks in her life. However, there are some not-so-subtle differences. Eve lives in a £2m house in an exclusive neighbourhood – no mortgage for her. She has a cool £1m in ISAs. She has plenty of other assets, too: a holiday home, a small art collection, some fine jewellery and a rather valuable vintage sports car. Oh yes, and one other thing: Eve has a SIPP, just valued at £200k. She’d like to spend the lot retrofitting cutting-edge, energy-saving “green” technology to her house – but of course the income limits mean she can’t.
It’s a contrived tale, of course, but I hope it illustrates a point. Neither can use flexible drawdown as neither can meet the minimum income requirement. Both are in capped drawdown, so both are governed by the same rules. But it’s a nonsense that they both have the same income limit. (In fact, ironically, Eve’s maximum income limit will be slightly less than Adam’s as the ECJ’s gender ruling hasn’t taken effect yet – but then she will probably live longer.)
The steep falls in the maximum income permitted that many investors have recently experienced have caused howls of complaints, letters to MPs and angry column inches. Some of this has been hysterics, hence my polemic in July, Drawdown Rhetoric should be Capped. Investment risk is part of the drawdown deal, so is interest rate risk – although the risk of the Bank of England printing £375bn to buy the government’s debt certainly should not be in my opinion. And since the way our society works is not to let people like Adam end up in the gutter because it’s their own stupid fault, guarding against the fund running out is not unreasonable.
Not unreasonable for those with little else to fall back on. Somewhere between a farce and an insult for those at all like Eve. That is why I’m very much a supporter of AMPS‘ efforts to get drawdown reform back on the political agenda and why I welcome their list of drawdown alternatives, particularly the innovative new ideas.
Not all the ideas on the AMPS list are good ones but it’s just a compilation, good, bad or indifferent. Returning to the old rules fails to address the underlying issues in the tale of Adam and Eve. Raising the GAD floor means adding a new distortion to try to off-set the distortion of QE – Learning the Wrong Lessons. Distractions abound: in my tale, our emotional reactions to Adam’s motorbike or Eve’s green credentials; in the drawdown alternatives, using indexes of different asset classes; in our logic, assuming that because in some cases capped drawdown doesn’t work, it needs changing in all cases.
Yesterday’s Autumn Statement proposes re-instating the old 120% of GAD for calculating maximum income (a sharp u-turn from the April 2011 rules). More flexibility for drawdown seems appropriate in principle – you can, after all, “turn off” income altogether so there’s the beginnings of a case for a corresponding upside. But there are still issues that need to be addressed.
Finding the faults is the easy bit, finding the solutions is much harder. My attempt is to suggest creating something in between capped and flexible drawdown – a sort-of “capped plus” – for those that are either asset-rich but don’t meet flexible drawdown’s MIR or whose sources of income do not qualify for the MIR. Those with qualifying assets in excess of a certain value could be allowed an extra tranche of income, perhaps with a number of tiers. The arrangement would be reviewed periodically to help people manage their drawdown of pension and non-pension assets appropriately. For those with alternative sources of income, a less onerous list than that for the MIR could be introduced. This would surely be more costly to administer than capped or flexible but let the market decide if it’s a runner.
Having the political guts to trust people with their own money seems to be the hardest thing of all – unless it takes even more guts to ignore the discontent. Is reinstating the 120% really enough? What do you think? Providers and advisers, get your thinking caps on and get involved in AMPS’ list!