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The annuity choice

Tom McPhail says that the Government’s consultation paper on removing the age 75 annuity rule means that everybody now has a choice.


I was surprised by how radical and progressive the Government’s consultation paper on removing the age 75 annuity rule is. It exceeded my expectations and those of most of the industry.

It is a very positive package and one of the strongest messages to emerge from it is that the Government can now look all investors in the eye and say you do not have to buy an annuity ever. That is a very strong message.

We know that for many people, purchasing an annuity still represents the best retire-ment solution but we also know that the objection to forced annuitisation has been one of the principle reasons why people have been reluctant to commit money to a pension in the first place. The Govern-ment has addressed that objec-tion and resolved the problem.

The consultation and very rapid implementation time-table of next April solves two problems. First of all, it gives investors real flexibility and, second, it will re-invigorate young investors’ willingness to commit money to pensions.

The capped annual limit will be quite low, so it may emerge that those people who are not eligible for the flexible draw-down option will conclude that in fact the capped drawdown income limits are less attractive than ultimately buying an annuity. They will have to be quite low to eliminate the welfare risk but the important thing is that the Government is giving people choice and the fundamental message that the more you save, the more choice and flexibility and control you will have is a powerful and positive one.

The 55 per cent tax charge on unused assets on death is probably about right. It is unlikely that people will put money into a pension specifically to avoid IHT and investors will probably conclude that the tax treatment is an acceptable trade-off for the flexibility they are being offered.

These changes mean it is no longer the case that the majority of people with smaller pension pots will automatically opt for an annuity.

Everybody now has a choice at retirement and we need to find ways to make it easier to exercise that choice. The outmoded concept that you can simply offer someone a default annuity at retirement is not going to work any more. People have choice and they need to think about how and when they draw their retirement benefits and that is something that everybody is going to have to do.

Tom McPhail is head of pensions research at Hargreaves Lansdown


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There are 2 comments at the moment, we would love to hear your opinion too.

  1. Julian Stevens 22nd July 2010 at 2:42 pm

    Whilst Tom’s optimistic spin on all this is, well, noteworthy (for want of a less diplomatic term), I cannot help but think that he’s making lots of noise about something which, as far as I can see, represents no great advance at all.

    Not having to buy an annuity is one thing. But if the alternative options for income withdrawal are still shackled to those infernal GAD Rates, and unspent funds on death will still incur a 55% tax charge, not to mention being assessable for IHT as well, then how is that likely to encourage any sort of step change in the attitude of the general populous towards retirement funding by way of a PP? I just don’t see it.

    “Capped Income DrawDown” is a typical phrase guaranteed to put people off. These latest changes are neither radical or simplifying and will do little, if anything, to restore Britain’s severely damaged savings culture.

  2. All of this spin to save and provide for a pension is admirable, but look at what has been happening. Defined benefit schemes have been abolished, defined contributions based on stock market investments are nothing but a punt at any given time. Sipps have been sold with high commission rates, poor performance.
    The only reason to pay into a pension is for the tax break.
    And now due to the financial services industry being totally out of control they expect everybody to work later and not draw a pension to 75. of course this will mean that a great % will die, leaving the remaining pensioners a greater share of the pension pot.
    All of the financial industry should now move to a salary based on performance, no commissions, only a nominal fee of £500 per client per year, which can then be increased with their perfromance levels. Only then will their clients feel they are getting better advice and value for money.
    The other alternative is for the government to take money of the financial industry, and provide a skills council to train people to take care of their own finance.

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