The obvious way to get around the inflexibility of annuities and high fees on investments is to use a self-invested personal pension (Sipp), which offer greater investment flexibility combined with better income flexibility via drawdown in retirement. But even Sipps have their problems.
Mike Morrison, head of pension development at AXA Wealth, says: "The whole issue of retirement and being able to draw the required level of income is becoming fraught with problems – the interaction of annuities, drawdown and the addition of portfolio protection is becoming a real minefield."
Not only have we seen falling annuity rates in 2011, but we have also seen an unprecedented fall in the amount that can be taken out of a Sipp via capped drawdown. The GAD (Government Actuary's Department) rate, by which capped drawdown income limits are set, is linked to 15-year gilt yields and has reached an all-time low of 2.75 per cent. In addition, government policy this year has reduced drawdown income from 120 per cent to 100 per cent of the GAD rate. So capped drawdown now has serious limitations, with many retired investors facing a potential fall in income of 20 per cent or more compared with what they were previously drawing (see example below).
The GAD rate for income drawdown is meant to make sure that you don't exhaust your pension pot prematurely and the low gilt yields reflect the fact that the market is extremely nervous about equities. But the drawdown income restriction takes no account of how your underlying pension investments are managed - for example, if your pension pot is actually growing notwithstanding the yearly drawdown.
Who can find me an income drawdown investor who is entirely invested in gilts? It is surely inappropriate for income limits to be based entirely on returns from an investment type that will only form part of a typical drawdown portfolio.
What we really need is unrestricted drawdown for all (not just for the tiny segment of pension investors who can first secure £20,000 pensions income). Unrestricted drawdown wouldn't mean less tax for the government - as income tax would still be taken on the withdrawals.
The government argues that the pensions deal is that, in return for the various tax reliefs, you mustn't spend all your pot and fall back on the state. But now that a flat-rate state pension is planned for all, this argument doesn't wash. The government can hardly claim that the planned £140 a week state pension isn't enough to live on.
So if a pensioner chooses to exhaust his fund by drawdown, and then live on the state pension alone, that is a personal choice, just as much as if he had saved money in the building society and then drawn it all out and spent it.