BLOG: Will your pension expire before you do?
When George Osborne pulled the rabbit out of the hat during his March budget everyone’s reaction was to say that greater flexibility in pensions had to be a good thing.
Indeed, there are times when people need some extra income, for example before their state pension starts, and forcing people to buy an annuity with a relatively small fund is not cost effective. But has Mr Osborne gone a bit too far with his liberalisation of income drawdown?
OECD chief economist Pablo Antolin has warned the change could lead to pensioners running out of money if fewer people choose an annuity as a result of the changes.
Since income drawdown was introduced in 1995 the amount of income which could be taken each year was determined by the Government Actuary’s Department (GAD). Although GAD rates changed on a number of occasions over the next 19 years, their aim was to ensure that the pension fund provided an ‘income for life’. People might not have liked the way they worked in practice, but most people were happy with the principal.
Retirement income specialists like Intelligent Pensions were always at pains to explain to clients that taking ‘maximum GAD’ was unlikely to be sustainable, particularly if you wanted your income to keep pace with inflation. In 2011 the government introduced ‘flexible drawdown’ allowing those with a minimum of £20,000 p.a. of ‘secure pension income’ to take as much as they liked from their pension funds; now Mr Osborne says everyone can have ‘flexible drawdown’.
With no assistance from the government or the government actuary, how will you work out how much income you can afford to take from the pension fund?
We launched an interactive ‘retirement income forecaster’ calculator which gives people an insight into the workings of pension drawdown. The calculator clearly shows that the current maximum GAD income (150 per cent) is not a sustainable income level so when this limit is removed, the potential for disaster will undoubtedly increase! Give it a try to see what level of sustainable income you could achieve in retirement.
I have no doubt a few people will follow the suggestion of Steve Webb and blow their pension funds (net of tax) on a Lamborghini. For everyone else, retirement income planning will be about taking enough income to live for today, but with the peace of mind to know that there will still be enough to live tomorrow.
David Trenner is technical director at Intelligent Pensions. Contact him at email@example.com.