The Government has unveiled its radical annuitisation reforms, although product providers say they are unlikely to be ready when the new rules are introduced next April.
Last week, the Treasury said it will not delay its plans to scrap compulsory annuitisation at age 75 and confirmed the new retirement rules will apply from April 2011. The new capped drawdown facility will allow people to withdraw from most drawdown pension funds, capped at 100 per cent of the equivalent annuity.
The maximum capped amount that can be withdrawn will be subject to a three-year review until a member reaches 75 and annually afterwards.
Investors will be able to access flexible drawdown in excess of the the capped limit, provided they meet the minimum income requirement of £20,000. Sources of income which count towards the guaranteed lifetime income are state pensions, defined-benefit schemes, scheme pensions and lifetime annuities. Currently individuals get around £5,000 from the state pension, although this is set to rise as part of reforms, which will count towards the £20,000 income threshold.
Prudential deputy chief executive Barry O’Dwyer ruled out launching a product by April 2011 while Aegon and Standard Life say they are unlikely to have a product ready by then.
But O’Dwyer says an MIR of £20,000 “makes sense”. He says: “When the consultation was first announced, we were worried the baby would be thrown out with the bath water but there is a strong sense of pragmatism coming out of the Treasury and I think that is reflected in the reforms.”
Suffolk Life marketing director John Moret says the proposals leave little time for the FSA to implement new Cobs rules, which will be required to implement the new regime.
He says: “The Government has largely stuck to its guns but it is interesting it has committed the FSA to amending its Cobs rules by April, which I think is quite a stretch to get draft rules, consult on them, implement them and give providers time. Three and a half months is pushing it.”
The broad thrust of the Treasury’s approach was welcomed by the pension industry but concern remains over the potential cliff edge created by reforms to taxation on death benefits following the decision to impose a 55 per cent charge on lump sum death benefits. Previously, the tax on crystallised funds was 35 per cent, increasing to a maximum of 82 per cent after 75.
AJ Bell marketing director Billy Mackay says the Government has effectively introduced a “pension death penalty”. He says: “Many savers want to be able to pass on a fair chunk of their pension funds to their families after they die. The Government wants to encourage people to save into pensions but now plans to pocket more than half of any funds left in their pension pot after death. They are using the positive story about greater flexibility at 75 as a Trojan horse to introduce a tax rise for a vastly greater proportion of the population than are going to benefit from this change.”
Treasury estimates suggest around 50,000 people currently in a drawdown arrangement could initially benefit from flexible drawdown if they choose to demonstrate they have sufficient secured lifetime income. It says “steady state” estimates indicate an extra 12,000 people a year may be able to access flexible drawdown.
Before the changes, alternatively secured pension provided the only option outside annuitisation after age 75. The Asp was subject to a maximum drawdown limit of 90 per cent of the amount of an equivalent annuity, with a minimum drawdown limit of 55 per cent to ensure savings were used to secure retirement income.
Savers could also access an unsecured pension arrangement before 75, enabling them to leave their pension fund invested, drawing down on income.
The maximum that could be drawn each year was 120 per cent of the amount of an equivalent annuity Capped drawdown will effectively provide savers with an extension of USP for the whole of an individual’s retirement.
Chancellor George Osborne first announced plans to remove the effective requirement to purchase an annuity by age 75 in the June Budget.
Removing the requirement to annuitise by age 75: the key Treasury proposals:
- Compulsory annuitisation at age 75 will end from April 6, 2011, when a new capped and flexible drawdown regime will come into force
- The cap on drawdown will be 100 per cent of the equivalent annuity
- The minimum income requirement for flexible drawdown will be £20,000 per year
- State pensions, defined-benefit schemes, scheme pensions and lifetime annuities will all count towards guaranteed lifetime income
- Death benefits will be subject to a 55 per cent lump sum tax charge