Each month we ask leading industry figures to answer one big question...
What impact do you feel changes to the Age 75 rule will have on the retirement planning industry?
Philip Brown is head of retirement products at Partnership
Removing the age 75 rule has a number of effects on both the industry and the consumer.
For the industry it will change the dynamics of the consumers using annuities and could potentially have profound impacts on the rates offered.
For the consumer the current generation of people at retirement is predicted to have a far greater life expectancy than previous generations (this is particularly so among the oldest cohorts where over the next 20 years people aged over 85 are predicted to increase by over 60% and people aged over 75 will increase by around 70% (Laing and Buisson 2009).
Peter Carter is head of product marketing at MetLife UK
Abolition of the Age 75 rule will simplify the options for retirement planning and will make pension saving more attractive for everyone, even those who choose not to use the new options.
Reforms should focus on encouraging savers to buy a lifetime income with their pension savings. This should be done while taking a responsible attitude to taxation and discourage people from trying to ‘play’ the system.
Providers will be encouraged to innovate and offer products such as unit-linked guarantees and other new solutions which will help people make the most of their pension savings.
Ray Chinn is head of pensions at LV=
Based on where we are today – in a consultation period – I don’t see much impact at all.
Even once the detail is clear on how any changes will be implemented, it is not clear whether this will drive a significant change in customer behaviour. Statistics tell us that the most common ages for annuity purchase are 60 and 65. The majority of people have made a decision and committed to buying an annuity well before age 75.
On the more positive side, if the compulsion to buy an annuity is removed then this will remove a perceived barrier to pension saving and have a positive impact.
Andy Gadd is head of research for Lighthouse Group
Any added flexibility in terms of how pensions can be used is welcome and will hopefully add to the use of pensions going forward. Obviously the changes to the age 75 rule are not the only changes on the horizon and we will have to wait to see how the Chancellor intends to deal with the issue of tax relief for pension contributions from April 2011 – which is likely to have a much greater impact.
Aston Goodey is director of sales and marketing at MGM Advantage
If a customer takes out an annuity, they benefit from ‘mortality cross subsidy’. The longer they live, the more they benefit as they are effectively rewarded for living longer. Indicatively, at age 75, this benefits customers to the tune of 1.65% while at age 76 it could be 1.83%. So by not annuitising, customers do not benefit from this mortality cross subsidy, and could be losing out on as much as £16,500 if they live for 15 years in retirement.
The good news is that you can now have the flexibility of products such as drawdown within an annuity contract due to innovation in the flexible annuity market, giving customers the best of both worlds and meaning they no longer need to defer annuitisation.
Nigel Hare Scott is managing director of Home & Capital Advisers
The welcome news of a relaxation in the Age 75 Rule will add flexibility and choice for many retired people whose sole asset at death would otherwise have been their home. Such homeowners should now be more willing to boost their pensions via equity release schemes in the knowledge that their remaining pension funds at death can be included in their estates instead.
Jonathon Howard is head of corporate clients at Courtiers Investment Services
The consultation document makes all the right noises, and I hope that the proposals get pushed through without too much meddling by third parties. Let’s not forget that Pension Simplification in 2006 started quite promisingly but then disintegrated into a farce.
Anything that increases flexibility and cuts down on red tape is bound to have a positive impact on the retirement planning industry and I hope we will see more people opting for USP in the future. The minimum income requirement should create a natural barrier to entry for those who are unlikely to benefit from the product (assuming it is set at an acceptable level), while empowering the remainder to plan for their retirements in the most efficient and desirable way.
Steve Lowe is marketing director at Living Time
Reform of the rule is important to help the industry meet retirees’ evolving needs. Many could squeeze more value from their pensions by using more flexible options early on then moving to a lifetime annuity, if appropriate, later, closer to age 80 when fixed benefits could make more sense and they are more likely to receive an income enhancement.
A change in the rule is a positive step, but we now need the law changed to replace OMO with a Pensions Passport to ensure mandatory shopping around delivers consumer and adviser benefits for retirees at age 65 as well as 75.
John Moret is head of marketing at Suffolk Life
I welcome the proposed changes which are radical. Potentially the new regime will offer improved choice and a welcomed simplification.
I am concerned that the greater flexibility brings with it increased risk. Experience since drawdown was introduced has shown a worryingly low level of knowledge around the mitigation of risk and too much focus on simple criteria such as critical yields and deterministic investment returns. Managing the different risks associated with income optimisation and capital preservation requires both knowledge and sophisticated technology. At the moment both are in relatively short supply.
Nigel Orange is technical support manager (pensions) at Canada Life
The removal of legislation restricting value protection payments after the age of 75 will also do much to enhance consumers’ and advisers’ views on the value of annuities.
The overall impact from these proposals may rest on what the government and the pensions industry, agree should be the minimum income level before a flexible (uncapped) drawdown can be arranged. The requirements around how the ‘minimum income’ is proven are a concern, in that they could become over complex and an administrative nightmare!
Brian Please is business development manager - insurance & payroll at Xafinity Paymaster
When Xafinity Paymaster asked a not dissimilar question in its inaugural Annuity Survey, there was an absolute 50/50 divide in views as to whether this increases the risk of ‘running out of money’ or not. With the government now intent on abolishing this, the risks become very real for some. What this will force is a greater need for advice and retirement planning as individuals will no longer be able to take the default, compulsory route of annuitisation. What the abolition of this rule will not do is change the economics of mortality making it increasingly advantageous as you enter your 80s to annuitise.
Ian Price is divisional director of pensions at St. James’s Place
The first thing the change does is to overcome the common objection that individuals raise when considering retirement planning via pensions – they do not wish to purchase an annuity, ever. In addition, it does address the issue of tax implications that apply on death under an alternatively secured pension (and scheme pensions).
It is important to keep everything in perspective. With the average fund of less than £30,000 after tax free cash, according to ABI statistics; in reality in changing the rules that applies at age 75 will have very little impact on the vast majority of individuals. Although the reduction in the tax rate that your fund could suffer on death after 75 has reduced from 82% to 55%, it is interesting to see the proposal that the tax rate on your fund will suffer on death before 75 has increased to 55%. One assumes this rate has been calculated by the Government to make it cost neutral, although it does seem quite high for those who die before age 75.
Jon Sadler is head of retirement at Alico Wealth Management
Lifetime annuities will always be a major part of a retirement portfolio, but savers must be offered greater products which can adapt with their changing needs. Unsecured pensions have been a good way of achieving this flexibility in retirement, but those who are concerned about future market instability are keen to hedge their bets. By working with their clients to manage the risk profile of their pension portfolio, it is possible for advisers to help clients find the right balance of security and growth potential and keep their options open for longer.
Tom Stevenson is investment commentator at Fidelity International
The end of compulsory annuitisation rewrites the retirement planning landscape but it will not change anything for many people.For these, annuitisation will remain the only viable option because the amount of money they will have saved into their retirement pot will be too small to consider anything else.
For others, the proposed changes materially enhance their options. An example is the teacher who contacted me this week to clarify new rules – he has a defined benefit government pension which should meet the minimum income requirement and also a £60,000 SIPP. Under the new rules he must choose whether to use this to buy an annuity, drawdown a capped income or take a cash lump sum, albeit subject to a 55% tax charge. What is certain is that he will require advice.
Paul Wilcox is chief executive of the WAY Group
This is great joined-up thinking by what appears to be a pragmatic new government. Subsequent announcements indicate that the swingeing effective IHT rate of 82% is going to be scrapped and in place there is likely to be a 55% ‘recovery charge’ without any extra IHT. In these dark days of budget deficits this seems like a good compromise.