Pension providers hoping to launch flexible annuity products have been dealt a blow after the Government revealed they will be subject to a lower annual allowance of £10,000.
Earlier this year, Money Marketing revealed industry concerns draft rules that allowed people who bought flexible annuities to retain the £40,000 annual allowance could be open to abuse.
At the time, one expert said: “The new rules allow annuities to increase and decrease. The only requirement is that there has to be an income for life. So if you look at the example of someone with £100,000, they could set up an annuity with a payment of £99,000 in the first year, leaving £1,000 to provide an income for life.
“In doing so their annual allowance won’t drop to £10,000. Someone doing the equivalent in a flexi-access pension would see their allowance drop.”
But the Taxation of Pensions Bill laid before parliament yesterday reveals people who take advantage of new rules which allow annuity payments to go down as well as up will see their annual tax-free savings allowance fall from £40,000 to £10,000.
AJ Bell technical resources consultant Lisa Webster says: “It was a surprise to see the flexible use of annuities and drawdown treated in different ways in the initial draft legislation.
“It makes sense for the rules on the level of contributions that can be paid after pension freedoms have been used to be equivalent regardless of how benefits have been accessed.”
Talbot & Muir head of technical support Claire Trott says: “This was quite a significant loophole because there was a risk people would launch flexible annuity products that were more akin to drawdown. I am not surprised they have moved to address this.”