Paul Leatherbarrow, Liverpool
The Coalition back in June 2010 announced during the emergency budget it is committed to abolishing compulsory annuitisation. Which is great news as the majority of people resent the forced purchase of annuities, especially as annuity rates are seen as unfavourable at present. The alternative at present is income drawdown which allows individuals more control over their capital & income, as well as allowing them to pass undrawn funds to their children. Many consider these as more favourable due to annuities considered poor value for money if you die early. The main Problem is if you die in the early years of retirement your fund disappears into the insurance company coffers
New rules
• No longer will you need to purchase an annuity or Alternative Secured Pension at age 75
• The Life Time Allowance will still apply at 75 and contributions into the plan must cease
• After age 75 lump sum death benefits are subject to the recovery tax charge which is likely to be 55% whether benefits taken or not presently it can be 82%
• Lump sum death benefits paid for pensions where benefits have not been taken are not subject to recovery tax providing death occurred before 75
• The government announced age compulsory annuitision at 75 will be removed from April 2011.
So what does it really mean to me and you
• Basically only a few will be affected by this change, the purpose of tax relieved pension is to provide an income in retirement and most will choose an annuity. Mainly out of necessity as they will need a regular income to meet buying expenses. They will not be able to leave their pension pot dormant.
• People are living longer in retirement and income needs to be stretched one option is to purchase an annuity later in life which will earn you a more attractive rate as the annuity company calculate they will pay for a shorter period. Most will need an annuity some time in life as this is the only way to guarantee your money will not run out if you live too long
• According to the Pension Policy Institute the average pension fund which purchases an annuity is £24,330.00
• Current legislation needs changing, due to strict limits on income you can draw & taxes up to £82 of every £100 seized upon death. The new rules will see a decrease to 55% tax
• Some believe by dissolving compulsory annuitisation could lead to many on lower incomes using their retirement assets too quickly which in turn would increase their dependence on the state this could be the next big miss selling scandal
• Two most common things people don’t like is the assumption the life companies make money on the mortality of the client and the assumption that they can get a better return than they actually receive
In conclusion
1. Annuities will remain the natural choice for many, if you have a larger fund you may wish to stay in drawdown past age 75
2. Some believe the impact will be modest and will only benefit the rich with large funds as the majority of people in retirement will need to access their funds as soon as they retire. Deferring their pension is not viable for most, added to this that the average fund size in UK is under £30,000 for many it is not an option
3. One of the main benefits of removing the need to annuitise that peoples retirement funds can be inherited by other pension funds when a person dies allowing you to pass more on to your family
4. By people deferring buying an annuity is essentially extending the risk phase of their investment well into retirement
5. On the positive side it will give greater flexibility up to age 75 after 75 the benefit is limited
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