Since the coalition government came to power in May the retirement income industry has seen unprecedented change - not least the launch of a consultation on abolishing the Age 75 rule. This is a subject close to the hearts of many within the retirement income market and has been greeted with almost universal enthusiasm.
Of course it is great that retirees have more flexibility. They can choose to annuitise later or not at all and the introduction of capped and flexible drawdown means people have more choice than ever before as to how they access their retirement fund.
However, once you’ve had the chance to sit back and think about the changes you can’t help but ask how much is really going to change? Entry into the various drawdown options will be dependent on satisfying a minimum income requirement. The level at which this should be set and assessed will form a key part of the consultation but early comment from Towers Watson suggests the level may need to be set at as much as £300,000 to prevent people falling back on state benefits. I would love to know what percentage of the population has a pension pot containing this much – not many I reckon. Considering the average size pension pot continues to hover around the £27-28,000 mark, how likely is it that these new options can be accessed by the average man in the street?
When putting this question to industry commentators many agree that the vast majority of people will not be able to utilise drawdown as part of their retirement planning. However, they point out that these people will still be able to benefit from being able to annuitise later in life and at a point where they may well be able to qualify from an income enhancement via an enhanced annuity. Again this looks true in theory but if you look at average annuitisation rates you can see that only a very small percentage of people wait until age 75 to annuitise anyway. Many people have already annuitised by age 65 so how will the changes benefit them if they have already locked themselves into an annuity contract?
The industry needs to use this flexibility wisely and ensure that people coming up to retirement are made aware of the different options available to them such as fixed term annuities. These enable people to keep their options open for longer.
It will be interesting to see the results of the consultation and I reiterate that the changes are good news for the industry and particularly for retirees at the wealthier end of the scale. However, the real challenges is, and will continue to be, ensuring those people with lower levels of pension have access to independent advice to help them get the most out of their retirement too.
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