The Treasury has given a cautious welcome for variable annuities.
A paper on the annuity market, published alongside the pre-Budget report, has left the door open for the development of a “mid market” in retirement income products.
Variable annuities are a new take on drawdown using hedging strategies and mortality guarantees to make them appear like annuities. In the US, 80 per cent of retirement income goes into variable annuities rather than conventional annuity products. The most common form of variable annuity in the US is “five for life” which guarantees the buyer an income of 5 per cent of their pension fund for their lifetime. If their fund performs well, this income can increase but if the fund performs badly, they still have a guaranteed income. Effectively, it is an annuity with some upside potential.
The paper says that the “Government is keen to take representations from industry” in relation to these new products. However, it also cautions that these products must follow the main characteristics of annuities. In effect, they must offer a guaranteed income for life from the age of 75 and must not allow funds to be passed on at death other than to dependants.
“Five for life” products have already appeared on the UK market but based upon life insurance bonds rather than pensions. This means that they do not qualify for tax relief either on the purchase price or through favourable treatment of the fund.
However, the current pension tax rules make it difficult to operate pension-based variable annuities and so it is good to see that the Government is open to the possibilities.