The Budget ushered in massive changes in the retirement income space. Helen Morrissey asks what this means for the industry.
When George Osborne promised to deliver a "Budget for savers" he really wasn't kidding as he unveiled the most radical pensions shake up in living memory
Retirees going into flexible drawdown will only have to meet a minimum income requirement of £12,000 per year. This is down from £20,000 per year.
Capped drawdown users will benefit from an increased income of 150% of maximum GAD -up from 120%.
In a widely anticipated change Osborne increased trivial commutation limits from £2,000 to £10,000. Figures from Skandia suggest that up to 25% of annuity sales are for pots of less than £10,000.
However, in a move that surprised the industry the Chancellor said that from April 2015 anyone over the age of 55 will be able to take their entire pension pot as cash subject to their marginal rate of income tax.
Delivering the changes Osborne said: "We will legislate to remove all remaining tax restrictions on how pensioners have access to their pension pots. Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want. No caps. No drawdown limits. Let me be clear. No one will have to buy an annuity."
Impact on annuities
Insurers endured a torrid time on the stock market in the immediate aftermath of the announcement. Just Retirement tumbled 42% while Partnership shares nosedived 55% leading to concerns about the future of the annuity market. However, many were keen to downplay any doomsday scenarios.
"What this means is the beginning of the end for bad practices in the annuity market," said Annuity Direct chairman Alan Higham. "No-one can get away with selling a poor annuity product now. While we might see a brief hiatus in the annuity market while things settle down there will be greater onus on ensuring people are able to make the right retirement income choices and so I expect the open market for annuities to grow."
Just Retirement director of customer insight Stephen Lowe agreed: "We need the dust to settle and look at whether these changes will actually change consumer behaviour. As part of the policy people will be getting guidance or advice which is a good thing and most people want a stable income in retirement which is what an annuity provides. Why would people want to raid their pension?
He continued: "When people sit down with an adviser they are choosing an annuity because they want a secure income and that won't change. The fact people are being pushed towards guidance and advice is a good thing. We need to remember that you haven't had to purchase an annuity since 2006."
B&CE head of policy Darren Philp believes the result will "sort out those annuity providers that really care for their clients from those who don't." He believes that the shift will prompt a greater focus on communicating the benefits of annuities now they are no longer the effective default for the majority.
"Getting the right annuity product at the right time and at the right rate is incredibly important and this move will force providers to better articulate the benefits of these products to their customers," he said.
Access to advice
AJ Bell head of platform technical Mike Morrison called the Budget "a Budget for financial planning" but advised caution on the increased flexibility.
"Anything that frees up the market has to be a good thing and underwritten annuities will have to stand on their own two feet," he said. "However, with this increased flexibility the need to keep a sustained income is very important and investment managers will need to make sure they have the right strategies in place. The growth of flexibility means the need for advice has never been bigger."
While those able to access regulated financial advice will be able to take full advantage of the new flexibility there are concerns about those who cannot. It is vital that everyone is able to access good quality guidance if they are not to deplete their pension fund and have to rely solely on the state.
The Chancellor said those retiring on defined contribution pensions will be offered "free, impartial, face-to-face advice on how to get the most from the choices they will now have." £20m has been set aside over the next two years to develop this service and it will prove vital to the success of the policy.
"We need to remember that with trust comes risk and the need to take personal responsibility," said B&CE's Philp. "The important thing here is that we are not locking people into tiny pension incomes. We have the single tier state pension that will provide a subsistence level of income and we are also auto-enrolling people into pensions - we are doing everything we can to get people to save more and think about what they want their retirement to look like -that has to be a good thing."
The retirement landscape is changing rapidly with people being offered more choice and flexibility than ever before. Over the long term this will change the market for the better. People will have more choice and we will have a more competitive annuity market which has to be a good thing.
However, the challenge here is education. For those unable to access financial advice it is vital they know where to go to get good quality guidance. Without this people will continue to receive poor quality retirement outcomes despite the extra flexibility they have.
An added tier of asset management can of course deliver additional benefits for certain investors, writes Graham Bentley - just be sure you can justify it to the regulator and, especially, the client
The government is "in daily contact" with industry figures over the pensions dashboard as it prepares for the roll-out and its feasibility report, Guy Opperman has said.
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From 1 April 2019
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