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Alternative thinking

Compulsory annuitisation at 75 is to be scrapped but what will be the impact once the coalition delivers on this vow?

Ray Chinn,  Head of pensions and investments, LV=
Ray Chinn, Head of pensions and investments, LV=

Even in the build-up to the publication of The coalition’s Programme For Government, more column inches were written than was justifiable in terms of the much touted abolition of compulsory annuitisation. Then, finally, there it was in black and white: “We will end the rules requiring compulsory annuitisation at 75.”

Nine simple words and one important number, so is all the fuss really justified?

First, let’s deal with the fact that compulsory annuitisation ended with the introduction of alternatively secured pensions at A-Day. Of course, the Asp rules are hardly encouraging to those wanting to retain control of their funds beyond age 75.

There are fairly restrictive minimum and maximum income requirements which limit income to between 55 per cent and 90 per cent of the Government Actuary’s Department annuity expectations.

The biggest challenge, however, is the restrictive death benefits and punitive tax treatment. In simple terms, beyond a dependant’s pension, other options are payment to a charity or the remaining fund taxed at over 80 per cent which does not make Asp a compelling option.

This sentiment has been reflected by the fact that few customers have chosen to go down the Asp route. As an example, my own company has only five live Asp cases. Indeed, annuity sales figures continue to show that 60 and 65 are the most popular ages for annuity purchase, with few waiting beyond 70 to annuitise.

The current situation with Asp does raise important questions about potential changes:

  • What will the new rules look like?
  • What will the impacts of any changes be?

Nine simple words and one important number, so is all the fuss really justified?

Shape of the new rules
Crystal ball gazing is always dangerous but there are a number of ways in which the coalition could look to deliver on this promise. The first is simply to move back the age at which compulsory annuitisation kicks in. This would make sense in dealing with one of the current issues – the fact that life expectancy has increased dram-atically since the original age 75 rule was put in place. However, it would not deal with the existing constraints that customers face in Asp if they do have an ambition to maintain control of their pension pot until much later in life.

Another option would be to revise the rules around Asp. It is likely in reality that the Government would still want to place some restrictions around how funds could be utilised to avoid the potential for customers to exhaust their pension pots and end up relying on the state for income in their later years.

In terms of tax treatment of death benefits, it is also unlikely that the Government would want to be overly generous to people with big funds in terms of mitigating the tax take on these funds. This could be seen to be at odds with the shelving of the Tory plans on inheritance tax.

The tax revenue position is an interesting one. My expectation is that when Steve Webb and David Laws start to look at this “promise” from a tax perspective, the civil servants who have been grappling with this issue for years will have some input.

Of course, there are more radical alternatives that could be considered, for example, greater flexibility around value protection beyond age 75 to tackle the challenge of the lack of death benefits available for those purchasing an annuity. However, with the simplicity (vagueness?) of the statement in the coalition programme, it is not easy to envisage this becoming reality.

Likely impacts
Until we have details on how this simple promise will be delivered, it is difficult to comment on the likely impacts. The biggest temptation is to make the comment that the changes are unlikely to have much impact all at and that, quite rightly, many will still decide that purchasing an annuity prior to age 75 is still the right thing to do to secure their income in retirement.

Where an unexpected benefit might arise is in the accumulation market. The current compulsion to purchase an annuity is often quoted as a barrier to pension saving, so removal may have some positive impact here. What is predictable, I expect, is that any changes to the compulsory annuitisation rule are likely to be some time away, given the other priorities that the politicians currently have on their radar.

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