An alternative view

Mary Stewart looks at how scheme pension should also be considered as a retirement income option alongside capped and flexible drawdown

New income drawdown rules are set to give a boost to a third ­option ­allowing individual retirees to take income from their pension funds – scheme pension.
The new rules, introducing ‘capped’ and ‘flexible’ drawdown, have generated a huge amount of interest, although in many cases retirees will find their room for ­manoeuvre more limited than before.

Under the old regime, scheme pension had been mainly relevant to older retirees and those in poor health. Now it stands as a ­potential alternative to anyone thinking of ­using capped ­drawdown, but ­wanting to take a higher income.

This is because those aged up to 75 are facing significantly tighter restrictions on taking income from capped drawdown. The limit has been reduced from 120% to 100% of the basis figures published in Government Actuary’s Department (GAD) tables, which approximate the income from a single-life ­conventional annuity.

Decreasing GAD levels

A second reason is that those GAD figures have recently been revised downwards, reflecting increased life expectancy since they were first published in 2006. Going forward, the impact of the European Union’s ban on gender pricing of annuities and of new Solvency II rules may depress the GAD figures further.

Under scheme pension, by contrast, the actuary takes into account the value of the fund and the member’s life expectancy to set the maximum income payable. The aim is to maximise use of the fund, stepping up the income to reflect an increase in the value of the fund or where the member’s health fades.

This means that the potential income from scheme pension can outstrip that available from capped drawdown from age 55 upwards, even if the member is in good health.

The tables (right), for example, show that a 65-year-old man can receive nearly 19% more income if in good health, rising to 50% more if in poor health.

Recent research from the ­Pensions Policy Institute ­suggests that at present, there may be 600,000 to 700,000 people, aged between 55 and 75, with sufficient assets to potentially make use of capped drawdown.

It suggests about 200,000 could make use of flexible drawdown, which removes restrictions on ­taking income providing the ­retiree can prove they have met the ­Minimum Income Requirement (MIR) of at least £20,000 a year of secured income

Considering the options

Those considering flexible drawdown should also consider scheme pension, which will give more flexibility and control over the assets than if they chose to try to meet the MIR by handing over the capital for an annuity.

Scheme pension, as with capped and flexible drawdown, does not give a guaranteed income although the individual member can choose the investment strategy, making it as cautious or as adventurous as they wish. Scheme pension is more responsive than capped ­drawdown to changing health through ­retirement.

There is an underlying assumption in the GAD tables that the retiree remains in good health and their only option to increase the income is to buy an enhanced annuity which means handing over the value of the fund.

Scheme pension can also be set up with a ‘Pre-determined Term’ of up to ten years, which ensures that income will be paid if the member dies (although the level of that income will depend on the performance of the underlying assets).

By potentially providing a higher income during the member’s lifetime and leaving less on death, scheme pension can give financial advisers greater scope to help ­clients with estate planning.

Retirees who have taken ­pension saving seriously will be keen to maximise the benefits during their retirements. The new drawdown options have some advantages, but scheme pension should not be dismissed without serious ­consideration.

Mary Stewart is a director at Hornbuckle Mitchell