The 2010 Budget gave us the final (complicated) rules on restricting tax relief on pension contributions for the very highest earners. But it also contained two suggestions from the Treasury on how to make buying annuities from small pension funds easier.
Figures from the ABI suggest the average fund used to buy an annuity is just over £24,000 – not very much at all. With the onset of automatic enrolment, more people will build up more very small funds as they save within their employer’s pension scheme for a few months and then stop for various reasons.
People can already take small pension funds as cash, as long as their total pension funds add up to less than £18,000. But occupational schemes – including Nest – have an additional flexibility where if the fund from one scheme is less than £2,000 it can be taken as cash, regardless of what other pensions the person may have.
The Treasury is now considering extending this flexibility to personal pensions as well. Very good news for those people affected, as well as greatly helping the administration of these pension schemes.
But the Treasury is concerned about abuse. It worries that individuals will set up, say, 100 different personal pensions just to access the whole amount as cash.
Personally, I can not see this happening. But if the Treasury want to guard against this then the easiest way is limit the number of personal
pensions an individual can take out to, say, 10 or 20.
Building on the principles of making it easier to access small pension funds, the Government is also interested in listening to proposals for couples to pool their pension pots to get better value by purchasing a joint life annuity.
To meet household expenses, partners will pool their resources. It therefore seems sensible if partners could pool their annuity pots
The basic rules governing how people can use their pension fund to buy an annuity were set about fifty years ago. At that time, it would have been more usual for the husband to build a pension income that was significantly larger than his wife’s.
Society has changed considerably since then. Now it is more common for a household to be in receipt of two separate incomes. To meet household expenses, partners will pool their resources. It therefore seems sensible if partners could pool their annuity pots to buy just one income if they so wish.
Importantly, it may mean they are able to afford a ’better’ income – often larger pension pots can mean better annuity rates. It would also mean only one decision, rather than the household having to carry out two annuity decisions. And a reduced income could be paid to the last survivor. This would offer better value for money than both partners buying separate joint annuities (as one joint annuity would be wasted when one partner pre-deceased the other).
Of course, such a change would not come without its challenges. There may be complications when people divorce, or civil partnership are dissolved, splitting the income back into two separate pots. But we already have pension and divorce rules so these may be appropriate here as well.
Overall, it is encouraging that the Treasury is willing to listen. Both these suggestions could be a significant step forward along the road of
making it easier for people to use their pension assets to buy them the type of income they need in later life.
Rachel Vahey is head of pensions development at Aegon