Warning drawdown rules trapping pensioners with poor pots

Pension experts warn investors could be stuck in poorly performing plans, as transfering out could lead to a loss of income following changes to drawdown rules.

New income drawdown arrangements, which became available on 6 April, allow investors to withdraw 100% of their GAD or equivalent annuity rate per year, rather than the previous 120%.

However, investors' GAD rates, linked to life expectancy, are now assessed every three years, or annually after the age of 75. Previously, they only were revised every five years.

Investors whose GAD rates were reassessed before 5 April this year will not have to revisit them for another five years. But any changes to their drawdown arrangement, including moving provider, will mean the amount they can withdraw is subject to the 100% limit and more frequent assessments.

Mike Morrisson, head of pension development at AXA Wealth, says this could mean personal pension investors could be trapped in schemes they would rather leave, as switching providers could bring about a reduction in income.

"If you want to move your pension, you will go into the new limits," says Morrisson, pictured.

"High charges could cause you to move from one SIPP to another, or someone who is in drawdown in an old-style personal pension may want to move to a full SIPP to get investment returns to maintain their income. However, they would be penalised for doing this."

Martin Tilley, sales and marketing director at Dentons, says his firm will be raising the issue with the Association of Member-Directed Pension Schemes (AMPS).

"It is more important than ever for an IFA to choose the right SIPP for their clients because moving them in future may reduce income," he says.

Tilley adds HMRC should have put in place a transitional rule allowing investors to remain in their five year assessment period when switching providers, and only move to the new regime when that five year period is up.

However, Morrisson claims this system would be much more difficult for the Revenue to administer.

A spokesperson for HMRC says: "Whether or not an individual chooses to transfer their fund to another provider is a matter of individual choice and we would therefore normally expect them to consider the assessment period when deciding whether or not to transfer their funds."