Over the last few weeks, I have been looking at the way that the results of court cases have been having a huge impact on various aspects of pension planning. I would like to continue the theme by considering one particular case which I believe is certain to bring about the removal of the age 75 restriction on purchasing an annuity.
Cherie Booth, QC, wife of the Prime Minister, is representing a pension scheme member – Joe Singer – in a fight which has now been taken all the way to Europe. If successful, the Singer case will have a tremendous knock-on effect for everyone who is currently a member of any type of pension scheme. Perhaps most important for IFAs, it will almost certainly result in there being no obligation on pension scheme members ever to buy a conventional annuity.
I think Booth will win and, if I am correct, pension drawdown, staggered vesting and retirement planning generally will be revolutionised.
There has, of course, been much discussion and speculation over recent years that the Inland Revenue may remove the upper age limit for annuity purchase or at least increase it to, say, 80 or 85. But nothing has materialised until now – if you look closely at a couple of developments and read between the lines.
The two developments are a European directive from last year and the Singer case.
The European Union issued a directive to all member states last year (Directive 2000/78/ EC) stipulating they have until December 2, 2003 to outlaw the common practice among employers of forcing employees to retire on reaching a pre-determined age. A member state can apply for this deadline to be extended to December 2, 2006, a facility of which the UK has taken advantage.
This will eventually mean that, while an individual remains capable of doing the job for which he has been employed, he cannot be compulsorily retired simply on the grounds that he has passed the employer's stated normal retirement age, typically 65.
One might speculate that although the EU has introduced this directive ostensibly on the basis that ageism is unfair and contravenes the Human Rights Act, the real reasons are we appear to be approaching a situation where we have a shortage of labour – certainly skilled labour – and we cannot continue to afford to pay state security benefits to an increasingly high number of retirees for an increasingly long period of time.
So, if we encourage employees to work longer and stop employers forcing them to retire, we will solve our labour shortage and deny millions of older workers social security benefits. Clever, isn't it?
In fact, it is being proposed that state pension benefits will continue to be paid from 65 for those who want or need them (it is still being discussed whether this should be “want” – an option open to the individual – or “need” – implying the benefits may be means-tested). But benefit payment may be deferred beyond this age for those who continue working.
This would (will is a better word, I think, if you get my meaning) have the effect of massively reducing the burden of state pension payments on the Government, which would/will look as if it is simply championing the cause of the elderly.
But what has this got to do with pension benefits as relating to the advice given by IFAs? I believe the decision as to whether or not the age 75 rule relating to obligatory annuity purchase should be amended or abolished will be taken out of the realms or discretion of the Inland Revenue and will instead be decided by this European directive, if only by default.
You see, we now know that it will soon be illegal to force someone to retire simply on the grounds of age. Therefore, it seems illogical to force them to draw pension benefits simply on the grounds of age. Otherwise, we could have the situation where someone continues to work well into their 80s (or 90s?), yet be forced to take the benefits from their pension at the same time.
Certainly, Booth seems to agree. She has agreed to represent in Europe a 75-year-old chap (actually, he was 74 when this case was brought) called Joe Singer who is miffed, to say the least, that he is being forced to take the benefits from his personal pension scheme at age 75. Booth contends that the rule contravenes the provisions of the Human Rights Act.
Implications and what to do next
I think Singer will win – and not only because Booth tends not to lose many battles. His case falls perfectly in line with the European directive mentioned earlier which, although not compulsory law in the UK (for another four years at least), will certainly have an influence with the European judges in so far as the directive has evolved from the same circumstances under which Singer's fight is being brought.
The implications of a victory for Singer are huge. It would appear to mean every pension scheme member could defer drawing benefits indefinitely, which would have tremendous financial planning implications for huge numbers of people reaching retirement age.
While waiting for this judgment, those coming up to the age at which they might want or be obliged to start to draw their benefits should seriously consider an income-drawdown strategy under which it is not necessary to buy a conventional annuity with an accumulated pension fund until age 75 – a rule which, if Singer wins, will have disappeared by the time that age is reached.
As always, watch this space and watch also for further news of a case in the name of Shillcock which I discussed last year. This relates to the possibility that clawback (or state scheme offset or integrated state scheme benefits, to give the principle a more technical title) may be outlawed.
Regular readers may remember that this Shillcock case could, ultimately, be attempting to link clawback with the part-timers' issue in the Preston case.
If successful, millions of employees (note that this is likely only to have an impact on current employees and employees who have left service within the last six months) will enjoy a huge and immediate windfall increase to their pension benefits as the effect of clawback on these benefits is removed.
Today's update? Well, the Shillcock case has pretty much gone to sleep as it waits for the final result of the Preston case, which, as I noted a couple of weeks ago, has just passed through the House of Lords. Little more to say for now, therefore, except that I would expect an early and important development.
So, that brings us largely to the end of our whizz-bang tour of pension cases – recent, current and future – and their impact on pension advice to individuals and employers.
Without a doubt, this is an area which deserves revisiting from time to time, as merited by developments.
Readers who are particularly technical may in the meantime wish to start following the developing Williamson case, especially if you love actuarial conundrums or are involved in pension transfers. But for the rest of us, I will move on to the fundamental use of trusts in financial planning from next week.
Keith Popplewell is managing director of Professional Briefing