Following a period of change in the capped drawdown market, Adrian Walker looks at what functionality can help you get the best income result for your clients.
A year is a long time in politics so the saying goes. Changes in government policy in that period of time and the potential impact of those changes on individuals are no better illustrated than in the area of capped drawdown.
In the last year we have seen changes to the calculation of the maximum annual income available for females as a result of meeting the gender neutrality legislation and then in March of this year a Government U-turn saw the 20% uplift on the basic maximum annual income calculation added back in. This was on top of gilt yields having reached an all-time low at this time last year.
These changes, combined with the seemingly constantly changing UK economic climate, are having a real impact on the retirement income market for the many clients with money purchase savings. The impact of these changes has really focused my mind on the benefit of arrangements that offer advisers and their clients in capped drawdown a member annual review facility.
Without such a facility the maximum annual income available within which clients can access their pension capital remains unaltered through the whole of a 3 year or remaining 5 year statutory review period, (with the exception of the statutory uplift of 20% on the current maximum annual income that will apply from the start of the scheme income year that started on or after 26 March 2013 for those clients currently in a 3 year review period). For those clients the uplift was based on a capital fund value and gilt yields from the previous statutory review date not reflecting the current position of those savings.
Having access to an annual rebasis review facility provides advisers and clients alike with a regular updated view, (based on the current drivers that affect the maximum annual income for capped drawdown), of what income levels are available to them before the next statutory review enforces a new threshold.
With gilt yields currently much improved from their low base towards the end of 2012, those clients currently in a 3 year review period, whose annual review falls due over the next few months, could see a significant increase over and above the automatic 20% uplift they will have available if an annual review is available to them. It is not only the possible benefit of being able to accept a new increased threshold, but the fact that this new threshold can be locked in for a new 3 year statutory review period that makes this facility attractive.
The need for flexibility
For clients whose contracts don’t offer such a facility perhaps there is a need to consider whether their current contract provides the flexibility that is needed to adjust to the changing economic factors that impact clients’ access to income.
The benefit of the annual rebasis review facility is not just the ability to lock in increases in income when the underlying factors are favourable. Having the ability to regularly review the possible maximum annual income between statutory review periods will enable advisers to discuss with clients how much income they should be using from those savings as part of an overall retirement income plan when underlying economics indicate that the maximum annual income currently available might be lower than the current statutory maximum would provide. Taking income at levels that are not really sustainable will only lead clients to a potential income precipice when the next statutory review falls due, as has happened in the past.
The Collective Retirement Account provides this facility as an automatic option within the contract, avoiding the need for advisers and clients to make a request for one. There is no additional charge payable for the facility on top of the current drawdown charge. For advisers wishing to just check from time to time on the potential future income available, our income calculator tool is a simple tool that provides indicative income thresholds for any client whether in a 5 year or 3 year statutory period.
Withdrawals from specific funds
The Collective Retirement Account has just been further enhanced to widen out the investment proposition for the at- and in-retirement market. A fund specific encashment facility has now been added to all Collective Retirement Accounts to allow income withdrawals to be taken from either the largest available fund, or from specified funds, in addition to the previous functionality of proportionately across all funds.
The functionality has been added to meet the demand from advisers whose retirement investment strategy for their clients requires this flexibility within a pension contract. This functionality can also, for clients using a Charge Basis 3 charging structure, be used to meet the Product/Service Charge and any adviser fees being facilitated through the contract.
For further information on this new important development please speak with your Old Mutual Wealth consultant.