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The Government today proposed bringing to an end rules forcing pension investors to buy an annuity at a specific age.
It says, from April 2011, there should no longer be a deadline by which people "effectively have to annuitise".
In a consultation paper published today, it says retirees will be able to choose how much to draw down annually from their pension pot throughout their retirement, subject to a capped limit, or whether to draw any income at all.
It proposes both capped and flexible drawdown options for private pension savers before and after age 75, adding this will make it unnecessary to continue to offer alternatively secured pensions (ASPs).
As part of the flexible option, the Government says unlimited lump sums can be withdrawn on the proviso minimum income requirements are met.
Advisers have already urged caution over an uncapped drawdown option after age 75, saying some investors may find themselves unaware of their dwindling pension pot and run out of income.
The Government will consult on the level of an "appropriate" annual drawdown limit for capped drawdown.
Residual funds will be taxable on death at 55% as per current income drawdown rules. Currently retirees in ASP can find themselves subject to taxes of up to 82%.
Financial secretary to the Treasury, Mark Hoban, today said the proposals will simplify the treatment of retirement savings and reduce complexity for individuals as well as for pension and annuity providers.
He said they would give individuals greater flexibility to choose the retirement options that are best for them, with more choice over how they can provide a retirement income for themselves.
"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"This consultation puts forward reforms that will replace outdated and overly complex pensions tax rules with a system that gives individuals greater freedom and choice."
Both the Conservative and the Liberal Democrat manifestos included plans for the ending of compulsory annuitisation. In last month's Budget, Chancellor George Osborne announced the age at which an investor has to use his pension fund to buy an annuity would be pushed back from 75 to 77.
But the Government today relaxed the rules even further. Consultation ends 10 September.
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Initial impressions....
Having spead read http://www.hm-treasury.gov.uk/d/consult_age_75_annuity.pdf my initial impressions are favourable.
Posted by: Phil Castle
Worth reading the paper
On page 14 they talk about a minimum income requirement (MIR), before allowing more flexibility to take uncapped income or capital (after suitable tax recovery). If ONS stats say a couple needs £337.70 pw (after housing costs) and state pension for a couple is £156.15 pw, the shortfall of £181.55pw or £9440.06 to provide a joint life annuity (5years age diff between partners) of this level with indexation at RPI per annum, would need an average fund value of £400,002 at age 60 , £335,945.19 at 65 and £223,169.26 at 75. (July Moneyfacts). For those who are single, you’d be looking at £185pw less state £97.65 = £87.35pw £4,542 so male 55 £154,489 60 £127,943 65 £103,935 70 so on, you get the picture. Basically therefore clients need to have a min each of somewhere in the region of £130k EACH at age 65 before they are aloud to move any excess. They need even more if they want to access it sooner, but a lot less if they want to access it later. It seems like a good idea, but can’t see how this addresses the issue of those with trivial pensions as the 1% of lifetime allowance rule means that there end up lots of uneconomic pensions to administer where purchase value was say £20,000. Why not increase the trivial pension limit to 3%, but tax that at 55% too? OK the individual would fall back on means tested benefits once they’d spent their trivial pension, but the govt would have taken 55% of it in tax anyway…..
Posted by: Nameless
Plymouth Brethren
I agree with the Plymouth Brethren - annuities are immoral, profiting from dead people's money...
Posted by: Ken Durkin
Wrong tax rates
As anyone looking at this article will see, the rate of tax on death should be 35% and in ASP currently if not going to a dependent would be lost to charity unless in an individually registered scheme, which is not common. I welcome the changes.
Posted by: Jon Martin
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No meat on the bone
It is pleasing to see that the new Government is at least consulting the industry, but how much they listen will be the crucial issue. There are several opposing forces here. The revenue take position, versus the incentive to save and perceived loss on death and crcuially the simplicitiy of understanding it. Lets hope they do listen and get it right first time. We don't need any more U turns or complications.
Posted by: Martin Tilley