With just over four months before the planned introduction of the Treasury’s new rules removing the requirement to annuitise, the industry remains in the dark as to just how it intends to introduce these significant changes.
Draft legislation is expected to be published on December 9, clarifying the Government’s key proposals to abolish the disliked alternatively secured pension. The current framework is to be replaced by a capped drawdown system that remains consistent through retirement and a flexible drawdown option allow funds to be withdrawn where individuals satisfy a yet to be formulated minimum income requirement.
The original consultation document, written barely 10 weeks after the coalition was formed, raises as many questions for advisers as answers, and achieving a workable minimum income requirement structure is one of the tougher nuts that policymakers need to crack.
Evolve Financial Planning director Jason Witcombe says: “The MIR needs to be more flexible than has been suggested in the consultation document. They are talking about only allowing index-linked pensions to count towards what keeps an individual off benefits but lots of people take out level pensions that are more than sufficient to keep them off the state. They need to set a higher level for level pensions or incorporate in the rules a facility for people with a certain fund value to be able to take advantage of this option.”
Witcombe’s perspective echoes the submission to the consultation put in by The Actuarial Profession, which proposed that pensions without LPI indexation should be included at 75 per cent of value, reducing the risk of creating an unnatural demand for index-linked annuities over level ones.
Standard Life head of pension policy John Lawson is hoping the Treasury will drop the idea of flexible drawdown altogether. He says: “The Treasury has received a big message back that there is no consumer demand for flexible drawdown at all. It is riddled with tax complexities and the tax charges mean it is not attractive even to the tiny minority of people who may be eligible for it.”
Instead, Lawson wants to see a greater flexibility over using funds in capped drawdown to pay for long-term care costs, addressing a cost to the state he warns is set to soar over the coming decade.
He would also like to see more creativity on shorter-term annuities, given people’s varying income needs through retirement.
He adds: “For example, it would be good to be able to get an annuity to bridge the gap until your state pension kicks in, in the same way that happens with defined-benefit schemes.” On the other hand, Burrows & Cummins director Billy Burrows is confident that flexible drawdown will come in although he agrees it will prove a red herring for most.
He says: “Of more interest is capped drawdown. If it is set at a sensible level, we could well see a new wave of Middle Britain clients deciding to go into drawdown. That would in turn lead to a raft of new lower-range drawdown products. We could see more interest in fixed-term annuities and those with investment linking, and a general trend towards people buying annuities at a later age than at present.”
The other key change that Burrows wants to see brought through into the legislation is the ability for providers to allow value protection after age 75.
Broader changes to the annuitisation process and the operation of the open market option may take longer to introduce as, while the issue was raised, there were no formal proposals put forward in the consultation document.
But there is a growing feeling that even the changes on flexible and capped drawdown may not make it on to the statute book by April 2011.
Burrows says: “There is a huge school of thought that says these changes are not going to happen this year at all.”
Suffolk Life marketing director John Moret says that even if the changes make it in to legislation by next April, he is concerned that many pension providers will be unable to deal with the numbers of people who want to take advantage of the new rules.
The Treasury consultation document predicts that only 8,000 people a year will want to use flexible drawdown to take their retirement income but Moret says the figure is likely to be much higher.
He says: “In their impact assessment linked to their consultation document, the Treasury estimated that around 8,000 individuals a year would use flexible drawdown, although this was dependent on the level of the MIR. This estimate appears to be some distance away from what the market believes. The precise details of flexible drawdown have yet to be finalised but over 90 per cent of advisers told us they have clients who would want to use flexible drawdown.
“Industry statistics suggest that the number of new drawdown cases in 2010 is likely to exceed 40,000 and a significant number of these are likely to be potential users of flexible drawdown. In addition, there are over 300,000 current users of drawdown, many of whom will also find flexible drawdown appealing. This suggests that the initial take-up of flexible drawdown could well be as high as 50,000 and that the annual take up will be well in excess of the Treasury estimate.”
If the level of demand is anything like he predicts, Moret says regardless of the detail in December’s announcement the run up to April 2011 and immediately after is likely to be a busy time for advisers and pension providers.
“With each week that passes whilst we wait to learn the detail of the new regime the pressure increases on providers and advisers to accommodate these changes in time for their proposed introduction in April 2011. This is at a time when providers are also having to cope with the pensions tax changes already announced and advisers are increasingly focused on 2012 and the RDR changes – not to mention the other proposed pension changes such as a new state pension and the launch of Nest and auto-enrolment.”