MIR annuity hurdle could be as high as £300,000

The pension pot needed to satisfy the minimum income requirement could need to be as much as £300,000 in order to stop people falling back on state benefits, Towers Watson says.

Yesterday, HM Treasury said the Government was set to scrap the requirement to purchase an annuity and abolish alternatively secured pensions (PP Online, July 16).

However, Towers Watson says the significance of the proposal to allow pensioners to access more of their money early on in retirement will depend on the size of the lifetime income that they first need to secure.

Under the proposed reforms, pensioners would be allowed to withdraw more than a set annual limit, but would first need to secure a lifetime income or minimum income requirement, to prevent them falling back on state benefits later in life.

However, Towers Watson says while the size of this MIR is subject to consultation, it could end up being a big number relative to most pension savings if the Government takes a cautious approach to ensure pensioners aren't forced to fall back on the taxpayer.

Towers Watson senior consultant Paul Macro says: "If you want to access more of your pension savings as a lump sum, the $64,000 question is still how much do you need to spend on an annuity first - and the answer could be a lot higher than $64,000.

"If the Government only wants people to remain free of the Pension Credit, those with strong entitlements to the contributory state pension may have a lot more freedom over when they can get their hands on their additional savings. However, the Government's concerns about 'double dipping' appear to extend to Housing Benefit too.

"Since homeowners could always sell up and spend the proceeds, a big secured income may be required to cover this. The bar would be even higher if pensioners were told to ensure they did not turn to the state for help with long-term care as well."

Single pensioners can currently claim at least some Pension Credit if they have an income of up to £184 a week, while couples can claim some Pension Credit if their income is £270 a week or less.

Although these amounts are far higher than the full Basic State Pension (currently £97.65 a week for a single pensioner), some pensioners retiring now with full contributory records will receive more than this once second-tier state pensions are included.

Towers Watson says, depending on where they live, a pensioner couple could need a total post-tax weekly income of £400 or more before exhausting entitlement to all means-tested benefits, including Housing Benefit.

Paul Macro says: "If the Government took a conservative approach, many people would have to use roughly the first £300,000 of their savings to provide a secure income before being able to access the rest of their money upfront.

"However, that number could fall if annuity rates improve, if means-tested benefits are pared back further in response to the fiscal crisis, or if the Government decides there is only a small risk of people running down all their non-pension assets."