Each month, we ask our industry to answer one big question!
Nick Bladen is head of marketing development at Skandia
The call from the Conservatives to amend the age 75 rule is welcome but it needs to go further. People don't have to buy an annuity at age 75 because they can choose to take out an alternatively secured pension (ASP) contract which enables them to continue in income withdrawal beyond age 75. However, the income limits and tax treatment within ASP contracts are too restrictive and the rules should be amended so that the income withdrawal rules are the same whatever age you are. Pension investors are being hammered on all fronts with falling interest rates set to lower annuity levels further and declining equity prices reducing the value of pension funds. These factors will result in significantly lower incomes for people if they take out an annuity now.
The Government should take a decisive step and abolish restrictions on income withdrawal to help people take control of their retirement income and not lock in to annuities that are being depressed by the current economic environment.
Marcus Carlton is director at HFM Columbus
I believe that sensible consideration needs to be given towards suspending or removing the age 75 rule so that prudent investors can plan a way out of their predicament. An extension to age 85 when mortality profit starts to kick in in a big way would at least allow the industry to design appropriate products to take advantage of that fact.
The crisis in the markets have been played out over a good 18 months now. For many people the perceived correct advice to hold on to assets has, in hindsight, proven to be damaging as the sell off in markets at the height of the banking crisis has been much more savage than most market professionals predicted.
Longer term investors always have the option to sit tight and wait for a recovery. Although Japanese investors are still sitting on an index a quarter of what it was 10 years ago and the markets took 25 years in the US to recover after the great depression, so this will come as no comfort to those investors sitting in drawdown pensions who are rapidly approaching their 75th birthday.
Peter Carter is head of product marketing at Met Life UK
Volatility can wreck retirement planning and the recent unprecedented swings in the market have really brought that fact home. When the FTSE-100 loses 21% of its value in a week it is no surprise that there are calls for changes to the age 75 rule.
It has always been the case that volatility is a potential threat to retirement income. That is why it is prudent to limit equity exposure when clients are nearing retirement and to shift the investment objectives from growth to conservation.
Investors who have adopted a more cautious approach will have limited the effects of the recent market turmoil. Those who have not would certainly benefit from a short-term relaxation of the age 75 rule.
The key is how investors respond if the rule is amended. History shows that in the long-run, equity values recover but investors may not have the luxury of time. Volatility may moderate but it will not disappear.
Bernard Footitt is technical manager (pensions) at Canada Life
We need to be careful about what 'the age 75 rule' is. The HMRC Registered Pension Schemes Manual states "Once a member reaches the age of 75 a pension may only be provided for the life of that member, either through the purchase or provision of a secured pension or, if benefits are from a money purchase arrangement, as an alternatively secured pension." (RPSM09103010). Some have even called for "the temporary suspension of forced annuitisation at 75".
Firstly, there is no compulsory annuitisation anymore. Secondly, the only significance of age 75 is that any unsecured pension (USP) fund will (a) have to provide an income of at least 55% of the Government Actuary's Department reference rate for a 75 year old, and (b) this will be reviewed and reset every year from then onwards. At the November 2008 reference rate of 4.75%, this would mean drawing down 5.61% of the fund for a 75 year old male and 4.95% for a 65 year old female. The only question this raises is "Is this sustainable going forward through these troubled times?".
Finally, 'amending the age 75 rule' is purely academic for someone who has only their house and a relatively small pension pot of say £100,000 or less at the time that they retire. How can they do anything but purchase the best annuity and hope that house values recover in the next five years to make some form of equity release work for them?
Paul Goodwin is head of marketing - corporate and pensions at Norwich Union
The Conservative's call to temporarily suspend the age 75 rule is an understandable reaction but it would not necessarily affect the very people it aims to help.
We sympathise with those who have experienced losses ahead of annuitisation - but a significant proportion of our customers need to annuitise before the age of 75 because they do not have significant savings to draw an income from. Those who have left it until 75 should have been appropriately advised to do so and may be able to take advantage of alternatively secured pensions (ASPs) if this is appropriate for them.
Given that such a change would likely require primary legislation, the timeframes involved (six-12 months before Royal Assent) could well that those worst hit by the economic downturn may not benefit. It would also lead to confusion, cost and inefficiency in the industry, something that we all want to avoid.
In short, the abolition of the age 75 rule is worthy of debate, but temporary suspension could set a difficult precedent that could cause issues at a later date, for example if we saw a dramatic downturn in annuity rates. Now is a time to reassure customers and maintain confidence in the industry.
Dave Harris is managing director sales and marketing at Living Time
We believe suspending the age 75 rule is a sensible proposal - this is not a time for anyone to be rushed into decisions they cannot ever change. Our philosophy has always been to encourage people to keep their options open through the early retirement years, to enable them to react and rethink their finances as circumstances change. At present it is the turmoil in the financial markets, but we shouldn't forget that individuals always face personal uncertainty in retirement such as whether their own or spouse's health will deteriorate.
The broader picture is that increased life expectancy has made the rule increasingly incongruous.
Ideally suspending the rule would be followed by a major rethink about the opti-mum time to lock into a lifetime annuity and whether the age 75 rule is undermining innovation. We would like to see some detailed consideration of whether the age limit should be pushed back to perhaps 85 when people have far better visibility over their future income needs, or even scrapped altogether to allow people total freedom to make the best decisions based on their circumstances.
Natanje Holt is managing director at Dunstan Thomas
The age 75 rule should be amended regardless of the volatility in the market. Each person's circumstances will be unique and selecting a hard and fast separation based on age is inappropriate.
Buying an annuity was historically the risk-averse option, but is this still the case? Annuities are definitely a higher risk option today as values fall below some pensioners' basic income requirements.
ASP on the other hand, although attractive, remains very complex to explain to the consumer because of the host of conditions and restrictions on allowed income, not to mention the potential tax implications on death. Needless to say people at this junction will need to consider this option now having explored the problem they face with an annuity. The intention here is that they may be able to recover some of their fund value before considering an annuity again. Unfortunately this becomes a minefield as, with the current legislation, you are forced to take income which will be depleting the very fund you are trying to replenish.
It would be great if the government reviewed this, unfortunately this takes time and will not serve the people facing financial difficulties today. The only other option would be to consider some of the more flexible options on the market such as the scheme pensions and family trust plans, which could help combined investors recover in the long-term.
Richard Mattison is business development director at IPS Partnership
Yes. One of the Government's priorities is a secure retirement for our OAPs, one that is not poverty stricken nor dependent on the State. Forced annuitisation at the age of 75, particularly in these uncertain times, will make the situation far worse.
In the SIPP and SSAS world, ASP and scheme pensions are options, but not for the vast majority of the population that does not have sufficient retirement savings to make them worthwhile. I think it would be a good idea to permanently raise the age of compulsory annuitisation to 85. However, I would go further and call for the scrapping of forced annuitisation once and for all.
Mike Morrison is pension strategy manager at AXA Winterthur Wealth Management
It is interesting that everyone is focusing on 'compulsory annuity purchase' at age 75 when from A-Day there has been no such compulsion. From A-Day it has been possible to draw an income after age 75 without buying an annuity using either ASP (alternatively secured pension) or scheme pension.
For many, before age 75, income drawdown unsecured pension, or USP, is a viable option but only if they are invested with some equity exposure and therefore some risk. For the majority of people annuity purchase is likely to be the only way of achieving absolute security of income, the only variable being when they buy.
It is accepted that it is wrong to make long-term irrevocable decisions when the markets are low but what we want is long-term reform as opposed to short term sensationalism. A temporary suspension of the rule (that does not exist anyway) would, in my opinion, achieve nothing more than create more complexity particularly in the sector of the market where financial advice is not readily sought.
The whole taxation regime surrounding the taxation of pension funds on the death of the individual after age 75 is draconian and could easily be reviewed and made more attractive, and this might have the effect of encouraging more people to save into their pension.
Martin Palmer is head of corporate pensions at Friends Provident
The age 75 rule does need changing - but not because it would 'give investors the opportunity to recover any losses'. There might be very unfortunate consequences for an individual who has reached 75 during the current market turmoil, but investing in equities has always been a high risk venture, and this is particularly true if you do not have the opportunity to stay invested over the long term. While it's difficult to predict specific instances of market volatility, it's not difficult to predict that stockmarkets will be volatile. Traditional investment advice suggests that spreading investments minimises risk, and by moving to less volatile investments over time you can reduce the risk of losing more than you can afford.
Investors need to be made aware of the risks they are taking, and changing the age rules will do nothing to educate investors about market risk. The recent market turmoil re-emphasises the fact that it is essential for people to consider the risks of being invested in equities when they are close to annuitisation.
Bob Perkins is technical manager at Origen
The knee jerk (and possibly most popular political) response would be to say 'yes', because it is possible that pension savers could be forced into taking an annuity at an inappropriate time.
Who does this affect? Well, mostly it will affect those individuals who have not yet crystallised their pension but who are now at or near age 75 and looking to make that 'at retirement decision'.
Those who have already crystallised their funds and who may be in ASP have entered that environment knowing what the investment risks were and so for them it is a matter of riding out the storm. That said, they are forced to take withdrawals at the minimum level (65% of the annual pension), which means that they do not have the ability to suspend income and support their lifestyle from other income and assets, in the same way as those who are in USP.
Those individuals about to crystallise their funds must do so by age 75. They will have no option but to do so under current legislation. This may affect them in different ways:
- they may now be looking at less in monetary terms as tax free cash;
- they may have less cash left to buy their annuity (where ASP is unsuitable);
- they may have to take at least the minimum withdrawals in ASP before the markets recover significantly.
Of course, many may have had the foresight and guidance to have been in cash or less volatile funds as the 'crash' hit home, therefore current issues are possibly less acute.
Decisions about taking income from accumulated funds are difficult and important enough in the current climate, without the added pressure of a deadline date and some Government support would be welcome I am sure. The question then is what happens at the next 'crash' and indeed when would the Government deem it appropriate to act?
The answer, if there is to be one, is probably the one that the Government doesn't want to give and that is to do away with the rule completely!
Stuart Russell is head of self invested pensions at Xafinity
To the extent that a member's pension benefits at 75 are provided via annuity purchase, either directly via 'lifetime annuity' or indirectly via 'scheme pension', they could face serious and permanent loss due to current depressed market values.
Hence it would be easy to simply say, 'Yes', the Government should amend the current age 75 rules. However, if this was done it then raises further issues:
- is this a permanent or temporary change?
- if temporary then for how long? At what point would the markets be deemed to have grown sufficiently to allow reversion to the current rules?
- if temporary and having reverted back to the current rules, how big a market drop in the future would be needed to trigger another relaxation?
David Seaton is director of Rowanmoor Pensions
The age 75 rules have never been popular and the current situation is a practical example of the problems that they can cause, so why not change the rules permanently? Even if the rules were relaxed, or changed, it would also require scheme rules to be revised before any practical benefit would result for the members in question.
The age 75 rule should be abolished because it is wholly unfair, ageist and a breach of the European Acts on discrimination.
We no longer have compulsory annuitisation at age 75. It is frightening that our politicians see it differently. For those who don't want to purchase annuities, there is ASP and many providers now offer an even better option with scheme pension.
However, we do require crystallisation by age 75. Anyone who is nearing age 75 should move his or her funds into non volatile secure assets. However, there will be many who have not been properly advised and now face a considerable drop in the income they can expect from their pension fund. I believe the Government should immediately remove the rules on ASP and scheme pensions and permit members to continue to draw down under USP rules i.e. 0-120% of the Government Actuaries Department (GAD) rate. To protect the Exchequer from loss of tax, a simple tax charge on death of 40% should be made against the pension fund where the fund is being left to beneficiaries other than dependants. The remaining monies should be left as a pension fund, for dependants.
Adrian Shandley is managing director of Premier Wealth Management
In the week ending 10th October 2008, stock markets fell to levels last seen in 2002 The recovery since 2002 had been gradual and consistent, whereas the falls in October 2008 were severe and sudden. This is coupled with the fact that most other asset classes have also fallen in value, including property and bonds. Even cash has not been a confident investment, so all of these factors put together have had a devastating effect on pension funds generally. Conventional thinking goes out of the window here, because we have always assumed that reasonably valued stock markets would play within tolerance margins and that a good percentage of the capital value today would still remain tomorrow. As life expectancy has risen, investors have increasingly had to allocate to higher percentages to equity based investments for longer in retirement so as to preserve a reasonable fund value. The old adage about 'have your age as a percentage in bonds' was dispensed with long ago. But even if you did subscribe to the percentage bond view, it would have done you no good recently either, because bonds have had a very torrid time. So by adopting a more cautious asset allocation close to age 75, there is no guarantee that you will protect your fund from significant falls. By retaining the age 75 rule for annuity purchase or ASP, the government is sentencing people in retirement to be at the mercy of luck. Why should people in retirement be subject to such a bizarre and unfair rule?
Mary Stewart is head of marketing at Hornbuckle Mitchell
Given that people are concerned about the safety of even simple savings accounts, it is totally unfair to force them to switch a lifetime of accumulated pension savings into an annuity, locking them in for the rest of their life.
This is a time to encourage people to keep their options open.
The broader principle is that turbulence is not limited to financial markets - people go through their own personal turbulence during retirement in terms of their health and changing income requirements. We believe suspending the age 75 rule should then be made permanent, allowing people the freedom to focus on making the right decisions at the right time to suit their own personal circumstances without Government interference via an arbitrary age limit.
Geoff Tresman is chairman of Punter Southall Financial Management
Financial experts are crying out for calm among investors and savers as the financial crisis engulfs us all. This call not to panic may be sound, but one group of people have just cause to ignore it. There are many thousands of people who are approaching retirement age and being forced to cash in their pension funds and buy an annuity. Those people approaching the age of 75 who have enjoyed the benefits of income drawdown are joined by those individuals in defined contribution schemes who, after taking their tax free cash have to buy a pension with the balance. While income drawdown is an option for many, a far greater number of people do not have funds that are of a sufficient size to justify or warrant income drawdown. To rub salt deeper into the wound, annuity rates are falling as interest rates fall and are likely to fall further. It is unacceptable that this scenario should continue and the Government should introduce immediate legislation to enable those people coming up to retirement to access their tax free cash and source income from the remaining funds without requiring them to purchase an annuity. The option of income drawdown should be made available to all and should have no age limit applied. The requirement to purchase an annuity at 75, irrespective of the economic conditions should be removed and replaced with a more flexible and coherent strategy that would protect the individual and in the medium to long term, the tax revenues of the treasury. There is a very simple and straight forward system that could be put in place that will be fair and equitable to the policy holder and their families while increasing the potential tax revenue to the treasury. Many leading industry figures have been calling for this change and it has been consistently ignored by the Government.
Andrew Tully is senior pensions policy manager at Standard Life
Scrapping the age 75 rule completely would be a positive move for pensions. It is an issue which puts people off saving, with the lack of lump sum death benefits after age 75 a particularly poorly thought out side-effect.
However, I don't believe making short term changes within pensions is the right step forward. Pensions are a long term investment with most savers well away from retirement. The number of people who will reach age 75 in the next few months who have not bought an annuity will be relatively few. Those who do have the option of deferring purchase by using alternatively secured pension. So I don't believe a kneejerk reaction is the right move.
We all know the age 75 rule is arbitrary. Potential solutions include scrapping the rule altogether, or reviewing the upper age limit in line with increases in life expectancy. But we need a suitable change for the long term which will benefit all pension savers, and encourage more people to save - not just a change for the next few months.
Adam Wrench is product development manager at London and Colonial
While this may benefit some individuals who are exposed to the current market conditions it only attempts to deal with the symptom rather than its cause. Some individuals may be worse off by delaying annuity purchase further if account is taken of mortality drag and the fact that the markets could still go lower. Individuals with average pension pots who continue to be exposed to the markets at the point of retirement will be hoping for high annuity rates coupled with strong equity performance up to retirement date. The benefits of financial advice might have been to recommend a 'lifestyling' approach to protect against short term market fluctuations. The challenge is to somehow make financial advice readily available to those who would normally be unable to afford it.
For those with larger pension pots age 75 doesn't present them with any barriers to successful retirement planning. ASP and flexible investment linked annuities available post 75 allows them to roll their investments over. London & Colonial for example allows clients to transfer their investments in specie into their annuity thus avoiding any forced disinvestment timing issues. In addition annuitants are able to maintain their open market option (OMO) indefinitely post 75 so that they can benefit from an enhanced/impaired annuity should their health deteriorate.
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