Adviser > News > July 2010 > HM Treasury Consultation: Removal of the requirement to annuitise by age 75
HM Treasury Consultation: Removal of the requirement to annuitise by age 75
On 15 July 2010 the HM Treasury launched their promised consultation on the removal of the "effective compulsion" to purchase an annuity at age 75. Will the proposals benefit your clients?
Why change?
The government's main aim is to re-invigorate saving and they believe that allowing additional flexibility will make pensions more attractive to savers. They recognise that people are likely to remain in retirement longer and will need more flexible solutions to help them meet their income needs over this period of time.
They do however re-state the primary purpose of pension is to provide an income in retirement, and acknowledge that many people will continue to choose an annuity as the best way of achieving this.
Main proposals
Consultation - next steps
The review will last for 8 weeks ending on 10 September 2010. This is to give the government time to draft and consult on the required new legislation before its scheduled introduction in April 2011.
What do you think?
HM Treasury also intend to run a series of meetings with interested parties. The consultation invites responses from "all ...organisations and individuals who have an interest in annuities and pensions taxation."
Responses should be sent to:
Age 75 Consultation
Pension and Pensioners Team
Room 2/SE
HM Treasury
1 Horse Guards Road
London, SW1A 2HQ
Or by email to: age75@hmtreasury.gsi.gov.uk
If you would like to attend a Treasury meeting, you can also register interest using the above email address.
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The requirement to purchase an annuity or Alternatively Secured Pension (ASP) at age 75, or any other specified age, will be removed. As a result ASP will cease to exist.
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The Lifetime Allowance (LTA) test will still apply at age 75 and contributions must cease as at present.
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Individuals will still be able to take a Pension Commencement Lump Sum (PCLS) at the point at which they access their benefits, however it will be possible to do this after age 75.
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Retirement income may be accessed via an annuity or drawdown plan, or combination of each, and will be subject to income tax.
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Capped drawdown plans will be an effective continuation of Unsecured Pension (USP) Plans with a maximum annual withdrawal limit. However the level of this limit is to be reviewed.
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Flexible drawdown plans will allow individuals to access (taxed) lump sums in excess of the capped limit, but only when a minimum income requirement (MIR) has been met. The level of the MIR is open to consultation.
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Lump sum death benefits paid prior to benefits being taken will continue to be paid tax-free prior to (the plan holder) reaching age 75.
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Lump sum death benefits paid after benefits have been taken, via annuity or drawdown, will be subject to a common recovery tax charge, likely to be set at 55%.
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Any lump sum death benefits paid after age 75 will also be subject to the recovery tax charge. This should prevent people simply leaving their savings untouched.
Consultation questions
The Treasury have asked for feedback on the following issues:
- The level of the annual income limit which would apply to capped drawdown.
- What types of income should be considered as secure enough to be included in the MIR.
- The level of the MIR and how it should vary for different ages and marital status.
- How government and industry can assist individuals with the choices open to them at retirement.
- Whether there are unintended consequences to their proposals which should be considered.
Our view
Scottish Life welcomes the Treasury's recognition that retirement needs are changing, not least in view of increases in longevity. In truth very few individuals will be affected by these specific changes, however the principles of increased flexibility and individual control are being emphasised and this should have a positive impact on a wider group.
In its present form income drawdown appeals to 3 main groups of "retirees":
| Customer type | Likely income requirements |
|---|---|
| Those wishing to access PCLS but not actually looking to retire | No income |
| Those wishing to take varying income over time as their circumstances change | Varying income but less than the maximum |
| Those wishing to avoid annuity decisions | Maximum income |
In order to accommodate all three groups it makes sense to set the maximum limit at a similar level to the equivalent maximum annuity. Leaving it at the current level of 120% GAD is consistent with this and the objective of preventing pensioners from running out of income in the early years. It also avoids considerable system and administration changes for drawdown providers.
Many people will be attracted to the potential to take their entire pension pot as a lump sum under Flexible Drawdown. The level of the MIR is therefore crucial.
If it is set too low people may simply spend their pension and be unable to meet their costs in later life. In particular the potential need for long term care should be factored in. Figures from the Pensions Policy Institute show that this is likely to affect 80 per cent of people who reach age 90.1
It therefore makes sense to set the level considerably higher than the level of means-tested benefits. In this scenario Flexible Drawdown would work more as a fall-back option, as described in the (first) case study in the consultation paper, rather than as encouragement to cash in. Those individuals who meet the test will be more likely to appreciate the value of keeping their savings within a tax-efficient environment and less likely to need to access high levels of income, or to pay the tax charge that comes with it.
The MIR must also be simple to calculate and easily verified. However, providers are unlikely to be willing to invest in costly system changes for a relatively small proportion of people.
As mentioned above, the proposed changes are very unlikely to mean that fewer people will buy annuities per se. However it could lead to their doing so later in life. Improvements in life expectancy mean that annuity decisions are being taken which could be effective for 20-30 years. This represents an opportunity for annuity and drawdown providers to create more flexible solutions to assist people through the prolonged transition period from full-time work into retirement.
As the market leader in income drawdown, Scottish Life will be at the fore-front of this change.
Reference:
- Retirement income and assets: do pensioners have sufficient income to meet their needs? - Pensions Policy Institute discussion paper.
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