Fiona Tait provides an update on the consultation to reform annuitisation
With the financial crisis leaving the UK facing up to the prospect of a prolonged period of fiscal austerity, the government has been praised for taking stringent steps to address the deficit through its Comprehensive Spending Review.
The Treasury’s review into the removal of the effective compulsion to purchase an annuity at age 75 goes a lot further than simply removing an arbitrary age limit. The consultation document includes the potential, for those who can afford it, to avoid having to take their pension benefits in the form of an income at all. It also considers changes to the treatment of lump sum death benefits for all those who crystallise their pension, either before or after age 75.
The majority of published respondents are in favour of retaining the existing GAD limits, at least up to age 75. There is no evidence that these limits are being abused or are causing consumer detriment and so there is no reason to change.
Some respondents believe that maximum rates should be capped at age 75, as they are now, by assuming the age of 75 for all subsequent calculations. This is to prevent older pensioners from drawing down too much as income and running out of funds.
Both arguments are sound. However, on balance, I believe the existing GAD limits should be retained. I would certainly encourage advisers and their clients to keep a very close eye on income patterns in this period of the client’s life, using the annual GAD review where appropriate.
Minimum income requirement for flexible drawdown
The potential to have full access to their retirement savings should be very attractive to savers who want to be able to spend their money as and when they wish. However, only those who already have enough income to meet their ongoing needs should be allowed to do this. The Treasury proposes a Minimum Income Requirement (MIR) which must be met before flexible drawdown can be taken.
The level of the MIR is crucial – and is the least predictable part of the review. At the lower end, the Association of Consulting Actuaries (ACA) suggests a figure of around £200 per week, or £10,400 per annum in order to make the option available as more than ‘a perk for the wealthy only’ .
At the upper end, in their responses to the consultation, the ABI and Scottish Life have suggested £25,000, which is in line with average earnings. Under the flexible drawdown proposals, individuals could withdraw and spend all of their pension savings in the year they retire. So it is essential that their remaining income/savings are sufficient to deal with unexpected events, or indeed the more predictable ones such as long-term care. There is also concern that people could view the MIR as a target for their savings and believe this will be sufficient for a comfortable retirement.
Some respondents, including the Association of Member Directed Pensions Schemes, have suggested there should be a capital fund requirement, instead of (or alongside) the MIR. This could take non-pension savings into account and has the considerable merit of being much simpler to verify than an income requirement. The downside is that capital can easily be eroded – either by investment conditions or by inflation – so the capital would need to be held in a suitable environment.
Lump sum death benefits
While the proposed tax charge of 55% on lump sum death benefits from crystallised plans after age 75 is welcome, the industry as a whole is against the proposal to levy the same recovery tax rate from crystallised plans prior to age 75.
We accept that the government would like to recover the tax relief paid into the plan, and that the main function of a pension should be to provide income not death benefits.
However, the figure of 55% was originally calculated on the premise that those who were likely to pay it – those in ASP – would have received higher rate tax relief over a long period of time. If you include all crystallised plans, which can be taken out at any time after age 55, it is less likely that this will be the case. For those who have received only basic rate tax relief on their investments 55% is too high. Most responses seem to suggest a rate of 40 or 45% would be appropriate.
One suggestion was that a lower level of tax on crystallised funds would be sustainable if uncrystallised funds were also taxed, both before and after age 75.
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