The coalition confirmed this week that it would be bringing in new pension rules that would see an end to retirees having to buy an annuity. Mark Hoban who is the current financial secretary to the Treasury hailed the new simplified rules which would offer retirees more flexibility. Instead of being forced into an annuity purchase, retirees will be able to take their fund “as a lump sum or as drawdown income.”
In place of the existing rules comes a new scheme of capped or flexible income drawdown. Under the capped solution, retirees will have the ability either to draw money from their pension fund subject to a ‘capped limit’ or if they so choose, not withdraw any money at all. The 25% cash free lump sum option stays in place. This solution of capping the amount one can withdraw is designed to stop savers exhausting all their money and then becoming more reliant on state benefits. Those with bigger pension funds who can prove they can meet this minimum income level will not face capping – although the income they withdraw will be taxed as income.
Indeed this change in pension policy was touted as being most beneficial to those with larger than average pension pots. Some argued that because annuities were seen as poor value it was deterring people from saving and was also causing resentment from those who wanted more flexibility with their retirement finances. Another benefit of the new system is that people will not be forced into buying an annuity when the government says so, and can delay a purchase if they choose to do so. Any funds left over from when the annuitant passes away will either be passed to a dependent or taxed at a single rate, thought to be around 55%. At the moment the rate varies depending on how old the annuitant was when they died, but in many instances the fund is essentially pocketed by the insurer.
Tom McPhail who is one of the most respected commentators in the pension industry said the new rules went further than he had anticipated. He said that…”…this is more radical than I expected. It effectively means no one has to buy an annuity, ever. Realistically, people on very small pension pots might not satisfy the minimum income requirement, so will have to buy an annuity anyway – the vast majority of annuities are purchased with relatively small pension funds of £50,000 or less”
Other industry observers such as the ABI’s Maggie Craig welcomed the commitment to the current annuity market saying that… “…for the vast majority of people, buying an annuity is the right choice, as it provides a guaranteed income for the rest of their lives. The government’s consultation is an opportunity to put a framework in place that works for all consumers, but it is vital that any new measures protect the principle that pension savings are primarily intended to provide an income in retirement.”
One matter that has been left open to debate is the maximum level of withdrawal under the capped model and the minimum income requirement under the flexible model. The government has invited vested interests from within the industry to contribute to this discussion. Another point to note is that inheritance tax will not be levied on unused pension funds, but the government will monitor any activity whereby people are loading their pension funds in an attempt to avoid being hit as hard with IHT.
