By Robert Stock Proposals to relax the obligation for UK pension holders to buy annuities are gather...
By Robert Stock
Proposals to relax the obligation for UK pension holders to buy annuities are gathering political backing, according to their main proponent Oonagh McDonald.
The proposals, drafted by the Retirement Income Working Party originally backed by Autif which McDonald chairs, suggest the removal of the absolute obligation to buy an annuity.
McDonald said the proposals had received a guarded but positive reaction from the Treasury and DSS.
However, the Inland Revenue still had concerns over the taxation issue. The proposals have come too late to be included in the Finance Bill currently before Parliament, however, she predicted that they could become a manifesto issue at the next election.
The Retirement Income Working Party has suggested that when policyholders retire, they only have to purchase an index-linked annuity of the size necessary to meet or exceed a Minimum Retirement Income (MRI). This is a figure calculated to provide a level of income above the best State-related pension provision available.
Other forms of lifetime income count against the MRI, so in theory savers could avoid annuities entirely, giving them the ability to preserve their savings for their descendants.
The system would be policed, according to McDonald, by the DSS or Inland Revenue, which would examine savers' finances and certify the size of annuity needed.
The remainder of the investors' funds would then be transferred to US-style individual retirement accounts, which would be subject to tax, for investors to dispose of or invest as they see fit.
She said: "These proposals would be beneficial to the whole industry. As we all know, life companies don't just sell life policies and annuities, they manage Peps, Isas and funds, as do the investment managers, and this will open up a new market for retirement income by inspiring people to save more.
"The obligation to purchase an annuity may well act as a disincentive."
McDonald admitted that the work of the Retirement Income Working Party has not met with universal support, but said it was the only credible solution to the inflexibility of annuities.
She added the proposals also matched public policy requirements to provide savers with an income for life without having them fall back on State benefit or reducing the tax taken by the Inland Revenue.
She said critics have pointed out that the proposals would see people pay more than they currently do for an annuity.
The average purchase price for an annuity in the UK is £30,000 yet estimates in the group's report show that a man would need £55,000 to buy an index-linked annuity and a woman would need £62,000 in order to meet the proposed MRI limits.
McDonald admitted that there would be no increased flexibility for small pension funds, but said that the average size of pension funds was increasing and that in time the flexibility would benefit more savers.
Responding to comments that drawdown offered better flexibility than the proposals, McDonald argued that drawdown only delayed the inevitable purchase of an annuity, and was best applied to funds of £250,000 or more, a figure unrealistic for the majority of savers.
An alternative suggestion to the age 75 problem has been to further delay compulsory annuity purchase to 85, or by product innovations within the current framework of legislation.
An example of that is the new annuity from Canada Life. It allows purchasers to buy five year rolling annuities, and retain some funds in an investment vehicle, until age 85 when they would have to buy a lifetime annuity.
The Retirement Income Working Party report is available in full on www.bbk.ac.uk/ res/pi/reports/Mar00.pdf.
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First mentioned in Cridland Report
Second acquisition of 2019