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