Conservative Shadow Work and Pensions Secretary Chris Grayling recently demanded the immediate suspension of the rule that forces people to buy an annuity by age 75. The Government pointed out that the existence of alternatively secured pensions makes the request pointless. It looks like the Asp debate could be back on.
This subject was one of the most controversial in the run-up to A-Day. This means that many of the arguments are already well formed. AJ Bell was heavily involved in the debate and the following acts as a summary of our points made at the time.
The debate on not forcing those with religious objections to annuitise compulsorily is not the key issue. The Government needs to accept that it would be impossible in practice to distinguish between those with religious objections and those who choose not to buy an annuity for different reasons.
Despite this, Ed Balls confirmed in a letter to Andy Bell in January 2007 that “introducing Asp was intended for those who have a principled religious objection to the pooling of mortality risk”. A recent debate in the Lords suggests this is no longer the case. Clarification is needed.
The real issue is the Government’s objection to bequests by pension savers to their heirs being subsidised by taxpayers. The challenge should therefore have been finding a level of tax that could be deducted from residual Asp funds that would render the Government’s fears non-existent. We suggested allowing residual Asp funds to be paid to heirs as a lump sum after a one-off tax charge. This would be in lieu of inheritance tax and any other tax charges that may otherwise be applied. We suggested a rate of 55 per cent, acting as a neutralising tax charge to recoup the tax reliefs previously granted.
This is not inconsistent with the 0 per cent/35 per cent tax position on death before age 75. It is not as penal a charge as would apply if the person had abused the authorised payment rules. It is also consistent with the treatment of pension savings in excess of the lifetime allowance at a 55 per cent tax rate.
It does not take an actuary to work out that one of the most suitable types of asset to match a portfolio of annuity liabilities is a portfolio of gilts. Recent press coverage has suggested that consumer concerns over security of assets would see a decline in demand for corporate bonds in favour of gilts. The greater the demand for gilts, then the lower the potential yield on these gilts, hence the lower the cost of Government borrowing. The Government has publicly stated that this is not a driver for current policy but it does make you think.
Let us hope politics does not get in the way of a common-sense solution for all.
Billy MacKay is marketing director at AJ Bell