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BeeHive  >  BeeLines  >  Annuity rules in the news again

Annuity rules in the news again

In this BeeLine I’m going to build on some of the things I have been saying at our roadshows around the country in the last few weeks. Below you will find a copy of an article I was about to issue as a BeeLine when things took yet another surprising turn. The article is still valid, but to keep it up-to-date it needs to be read in conjunction with this preamble.

You will know I am in favour of a loosening up of the annuity rules and I am hopeful we will see some steps in that direction in the next few days when the green paper is finally published. It has always seemed likely to me that the annuitisation rules would not be likely to stand as they are for much longer.

Yesterday, the Conservative MP Edward Garnier QC tabled a Private Member’s Bill calling for an end to the rule that forces people with pension savings to buy an annuity by the age of 75.

The idea being proposed is that once people have purchased sufficient annuities to ensure they are not a burden on the State, they would be left to spend or invest any additional pension funds they have in a way that suits their own financial and personal circumstances. This isn’t far from the position now taken in Ireland since their groundbreaking new pension legislation, which you may know I admire, was introduced last year.

We will keep you up-to-date with the progress of this bill as things develop. In the meantime, you may be interested in the paper below which many of you have requested following the seminars. It is the paper on which I based much of the material I spoke about on the tour. The full article is as follows:

The ‘at-retirement’ Market.

‘Strictly speaking, this market does not yet properly exist, at least not in any reasonable scale. The vast majority of the funds accumulated in UK pensions schemes re-enter the economy in the form of annuity income and tax-free cash sums. The income drawdown facility applying to some individual defined contribution arrangements is a relatively new option and is only really suitable for those with substantial retirement funds. In effect it is a fairly expensive, self-managed annuity with quite high risks attached to it and as such is likely only to ever be a niche product. However, there are strong indications that the annuity rules in the UK will be reformed in the near future. It is possible the process of loosening up the annuitisation requirement could even start with the reforms that are currently going through. However, whether or not changes are made immediately, it is clear that thinkers in all of the major political parties are being influenced by the very organised lobbying groups who are looking to bring about annuity reform.

It is interesting that in the last few weeks David Willetts has said that a future Conservative government would remove the need for full annuitisation of individuals’ pension funds. He is picking up on a widely held belief that people taking on the risks associated with pensions should have more control over them as a result. The main driver for annuity reform in both the UK and the US is likely to come into play for seemingly pure marketing reasons and as a consequence of the twin drives to individual ownership and defined contribution arrangements. The marketing reason is a simple one to understand. There is a particular group of people, born just after the last war, who have fundamentally changed every market they have come into contact with. They are referred to as ‘Baby Boomers’. In the US and the UK, these people are now coming up against the annuity markets and, to put it simply, they don’t like the look of what they see. It seems unlikely the annuity markets will survive this demographic wave, particularly as they are the very people who own so much of the accumulated pensions wealth in occupational and individual pensions.

Given the amount of money tied up in pensions in the UK and the age profile of those who own the vast bulk of it, any relaxation of the annuity rules could have a significant effect in creating a new and substantial advice driven market for people as they move into ‘retirement’. For those people who already own the major share of the UK’s accumulated pension savings it is likely their average holding is worth more than the average property investments of the same group. That their main item of wealth when they reach retirement age should be tied up in something, pensions, that they can hardly properly understand, and that these assets could assume an ever widening range of investment and insurance options, must be good news for advice-based companies and distributors such as IFAs with comprehensive pensions knowledge and access to both investment and insurance products. Put simply, if a combination of annuity purchase and lifetime asset management of erstwhile pensions investments becomes possible for the vast numbers of people who already own most of the UK’s pension assets, then a new long-term wealth management market would come into being. If so, it should then be possible for IFA firms to build worthwhile business models around the new choices consumers would have available to them.’

Steve Bee
12 December 2002