Government to relax annuity laws
The Treasury has announced that it will look at relaxing the law requiring everyone to buy an annuity by age 75.
This follows the coalition government’s decision in the Emergency Budget to end compulsory annuitisation by April 2011.
The Treasury has just started an eight-week consultation into the matter and hopes the change will help to revolutionise investor attitudes towards pensions and kickstart retirement saving for many.
“To encourage people to take greater responsibility for their financial future, including in retirement, we need to give people greater flexibility over how they use the savings they have accumulated. This consultation puts forward reforms that will replace outdated and overly complex pensions tax rules with a new system that gives individuals greater freedom and choice," says financial secretary to the Treasury, Mark Hoban.
Currently, investors stand to lose much of their pension fund if they die shortly after taking their annuity. Those not purchasing annuities after age 75 risked tax charges of up to 82% on death. This greatly reduces the incentive to save in a pension for many people, with the knowledge that a significant part of the fund’s value is lost on death – and therefore not available to pass on to love ones.
The pensions industry as a whole has welcomed this decision.
“This consultation is a revolutionary change, putting investors in charge of their own retirement plans. Combined with the tax breaks available on pensions, these simple messages will be very popular with investors,” says Tom McPhail, head of pensions research at Hargreaves Lansdown.
Barry O'Dwyer, deputy chief executive of Prudential UK, calls the proposals “sensible”, while Tim Whiting, spokesperson for The Annuity Bureau, welcomes the flexibility and potential for more of people’s savings to be passed on to family members instead of an annuity company.
However, Whiting is sceptical though of how big a difference it will make to the bigger picture.
“Overall the impact will be modest and only likely to benefit those with large funds. The vast majority of people will still need to access income as soon as they finish working and so the option of deferring their annuity will simply not be viable,” he says.
McPhail agrees: “The average retirement fund in the UK is less than £30,000 and at that value flexibility really is not an option. Overall, therefore, this is a positive step forward, but only for a select few individuals.”
He estimates that in the short term the majority of people will still buy an annuity because 90% of annuity purchases are for £50,000 or less.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.