In the early 1990s, annuity rates were on a downward trend and equity markets were producing consistently good returns. A couple of providers sought to bring out flexible annuity products which would have allowed continued investment of pension funds.But the Inland Revenue trumped these new contracts in 1995 with the launch of income drawdown, which removed the requirement for compulsory annuitisation on retirement by allowing drawdown until age 75. Lobbying continued to extend this and, after many years of consultation, the industry welcomed the introduction of alternatively secured pensions in the Finance Act 2004 as part of the pension simplification process. Asps removed the compulsion to buy an annuity at 75. Everyone seemed happy. Investors would not need to buy an annuity but could continue drawdown until death. The Revenue would increase its tax take by the inheritance tax payable on left-over Asp funds. Asps became available from April 6, 2006 and were the subject of wide press coverage, particularly with regard to the IHT treatment of left-over funds. The statutory provisions and the regulations allowing Asps do not make any restrictions on who can use them, as long as they have reached age 75. In a Commons debate on the Finance Act 2006, a Treasury spokesperson suggested that the original intention had been to make Asps available only for those with a principled religious objection to annuity purchase and that instead they were being represented by the industry as a mass-market product to avoid tax. The continued availability of Asps was put in doubt. At a recent meeting, Treasury economic secretary Ed Balls was quoted as saying: “The danger is that it contradicts our view on compulsory annuitisation at 75, potentially has some problems for us and is outside the original intention.” So it appears that compulsory annuitisation is still the intention of the Treasury at age 75. But why? The world has changed and compulsory annuitisation is difficult to defend. Let us look at a few of the underlying facts: l Annuity rates have fallen by 40 per cent in the 10 years from July 1996 to July 2006 and there appears to be no real possibility of them rising. Increasing longevity, increased triviality limits, the growing availability of enhanced annuities and the demand for gilts by defined-benefit schemes are several factors which would suggest that rates will continue to fall. l Stockmarket returns are up and the performance of property over the last few years demonstrates that it is possible to get better than gilt-based investment performance. l How can you justify forcing the conversion of a portfolio of equities and property into a gilt-based investment just because of a random factor such as age? l An IFA could not justify to the FSA that selling an investment that had fallen by 40 per cent in 10 years with no real possibility of an upturn was good advice. How can it be so by law? l The Government is looking for confidence in its state pension reforms and in particular its proposed national pension savings scheme. Any confidence is likely to be dented by yet another pensions U-turn. l Could compulsory annuitisation encourage people to take their pension schemes offshore, legitimately or otherwise? If the Government perceives Asps as a problem, why resort to abolition? There must be another way and there has been talk of an extra tax charge to make Asps less attractive. I think that people will accept extra tax on Asps provided it appears reasonable. This must mean that the Treasury does not take a punitive level of tax but seeks to mirror what it would get from an annuity. There is an argument to say this is already the case, with the IHT on Asps giving more to the Treasury than annuity purchase. There have been a number of suggestions for redesign. A minimum level of income after age 75 would mean a guaranteed stream of income tax to the Exchequer, so why not introduce a minimum of 35 per cent or even 50 per cent of Government Actuary’s Department rates? The perceived problem with the IHT charge on Asps is that it can be at least delayed, if not avoided, by passing the use of funds on to a spouse or financial dependant. A flat-rate tax charge on death of, say, 40 per cent on Asp funds would probably prevent such tax deferral and be acceptable to most people. Sixty per cent to allocate to other family members is better than the return on annuity purchase. It is likely that the money passed on to the pensions of other family members will also generate tax. Whether we get redesign, revision or abolition may well depend on whether political dogma overrules common sense and a desire to help the confidence of the pension world prevails. Hopefully, the situation will become clearer at the next pre-Budget statement but I get the feeling that this one might run and run.
Providers are being encouraged to whistleblow on IFAs with severe commission clawback debts by the FSA.
O&M Systems director Jason Wykes asks just who is the customer that needs to be treated fairly – the employer who pays a benefit consultancy to encourage members to leave a DB scheme or the member who is about to give up valuable retirement benefits for a flat-screen TV and an unexpected tax bill?
An IFA is calling for a mortgage lender to refund a £2,700 early repayment charge made on a widow after her husband’s death. Sam Davis, who has three young children, says Redstone Mortgages has ref- used to waive the penalty despite being aware of her circumstances. Her husband Darren died in August and the £70,000 […]
GAM Star Asian Equity
Cormac Weldon, Artemis US equity manager, looks at opportunities in the banking sector arising from US wage inflation. Click here to read the article.
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