Govt set to further relax forced annuitisation

The Government is expected to throw its weight behind the scrapping of compulsory annuitisation when it launches a consulation on pensions funding tomorrow.

Head of pension research at Hargreaves Lansdown, Tom McPhail, says the Treasury is poised to make a "radical" change to the current requirement to purchase an annuity by age 77.

At the very least, the firm expects the age individuals must buy an annuity to rise for the second time in less than a month.

But it says much more likely is the removal of the "arbitary" age cap altogether, allowing investors to draw down income "indefinitely".

The move would build on an interim statement made in the June Budget which pushed the annuitisation age up from 75 to 77.

But Hargreaves says any change will require investors to secure a minimum level of guaranteed income to ensure they won't be a welfare liability to other taxpayers.

Investors will then have the freedom to draw on the balance of their pension investments either as a lump sum or in the form of a drawdown income.

The arrangements would help investors pass on their remaining pension assets to other family members on death, says the firm.

McPhail says the rule change represents a "fundamental shift" in the Government's attitude to retirement saving.

"The problem has been whilst the Government gives generous tax breaks for pension investors, on death after age 75 the fund is lost - either to the annuity company or to the taxman (through an 82% tax charge).

"This loss of fund on death has often been cited as a principal reason why investors have been reluctant to commit money to a pension."

However, speaking this week at its Savings & Protection conference, the Association of British Insurers (ABI) says while overhauling the age 75 rule will "reinvigorate" the retirement income market, care should be taken not to undermine the annuity sector.

The coalition Government has sought to "reform" the complex pensions system since coming to power.

Last week it announced it would index private sector pension increases to the consumer prices index (CPI).

The move, which could slash £100bn from scheme liabilities, has been criticised by some quarters as a "stealth cut".

Pension increases for private sector schemes are currently indexed in line with the Retail Prices Index (RPI).

Also earlier this month, HMRC finally retreated on a change in the minimum state pension age which hit 50 to 55 year-olds with a 55% "unrecognised transfer charge" for switching their pension to a different provider.

It was flagged up as an "unintentional consequence" after the normal minimum pension age increased from age 50 to 55 from 6 April 2010.

The Chancellor also used the Budget to allow people to work beyond 65 if they wished,giving them longer to save for retirement.