THE government this week announced that it will abolish compulsory annuitisation, giving millions of pensioners more flexibility in how they generate their income. Annuitisation by age 75 has technically not been compulsory since 2006, but the only other permissable option, an Alternatively Secured Pension, was so highly taxed upon death as to mean only 4,000 people currently use it. As part of the policy’s abolition, the coalition yesterday launched a consultation as to how its new pensions policy will work.
The most significant effect of the policy change is likely to be the expansion of draw-down pension funds as people are allowed to keep their pension invested as long as they want. The proposals also enable those who live beyond the age of 75 to pass their pension on to family after they die (which is impossible with an annuity) and to alter their annually.
As part of the changes, those with defined-contribution schemes will also be able to withdraw as much as they want from their pension pots, with the first 25 per cent of the lump sum tax free.
The catch, however, is that the government still wants to ensure that pensioners don’t draw on state benefits if their pension fund runs out. That means there will be a minimum income requirement of around £10,000 per year – but it has yet to be decided how pensioners will prove they can provide this. The problem is that there are not many ways to do so without the purchase of an expensive annuity that could cost more than most people have accumulated.
Towers Watson’s Paul Macro says: “If the government took a conservative approach, many people would have to use roughly the first £300,000 of their savings to provide a secure income before being able to access the rest of their money upfront. However, that number could fall if annuity rates improve, if means-tested benefits are pared back further in response to the fiscal crisis, or if the government decides there is only a small risk of people running down all their non-pension assets. Most people don’t have pension pots of this size.”
Despite this, the policy change at least gives you more control over the risk-return trade-off of your investment. Even with this option, however, Hargreaves Lansdowns’ Laith Khalaf says: “Most people will still want an annuity because it provides you with a secure income for life. But one thing that people don’t do enough at the moment is shop around for an annuity rate, which can get you a 20 per cent higher income for the rest of your life. The government is looking at reforming the system to encourage people to shop around.”
But, as with many elements of the policy changes, the details (and their devil) have yet to emerge.