Warning for value guaranteed annuities after rule change

Prudential deputy chief executive Barry O’Dwyer has welcomed the Treasury’s new draft rules for retirement options, but warns there may be problems ahead for value guaranteed annuities.

The products pay out all future benefits to the beneficiary of the policyholder on death, in an effort to provide better value for money than annuity products where the policy dies with the pensioner.

However, O'Dwyer says the death benefit taxes imposed by the new draft legislation could cause problems for these types of annuities.

"The only part I would have like to have seen differently is the 55% tax on death, which will grab back the 40% tax relief people initially got," O'Dwyer says.

"This could be a particular problem with value guaranteed annuities, as people will pay a massive tax charge on the repayment.

"The consumer reaction to this in our research has been very negative, but then again, tax relief was designed to aid pension saving, not estate planning."

Billy Mackay, marketing director of A J Bell, says the tax on death is negative for many more people than those with value guaranteed annuities.

"The government has effectively introduced a pensions death penalty," he says.

"Millions of people have seen the tax charge on their pension funds when they die hiked up from 35% to 55%.

"The government is using the positive story about greater flexibility at 75 as a Trojan horse to introduce a tax rise for a vastly greater proportion of the population than are going to benefit from this change."

O'Dwyer adds today's new rules are generally a positive step for the future of pensions, despite the problems they will cause for the industry.

"Like most providers we will struggle to be ready for April 2011, but the government wanted to establish certainty and we will prepare as quickly as we can," he says.

"It was more important today the government got the framework right with this balanced set of proposals.

"The £20,000 a year minimum income requirement (MIR) is a clever move, which allows the government to remove the complications of having an index-linked MIR which would have radically distorted the market for people already in level annuities.

"In the interests of simplicity, each member of a couple would need £20,000. This could produce interesting anomalies, but only a few, and adverse effects can be fixed in time."