Scrapping age-75 rule will aid the wealthy
Annuity rule changes will mean flexible arrangements – for some.
Saturday 11 December 2010
You'll no longer be forced to buy an annuity by the age of 75 from next April, after the government published new pension rules on Thursday. While the change will have an immediate affect on those approaching or already in retirement, it is likely to have a lasting impact on the retirement planning for millions.
The new rules will be introduced in the 2011 Budget and come into effect from the start of the next tax year on 6 April. The change should mean more flexibility, but who will it affect and how should you change your retirement plans? The scrapping of the age-75 rule will affect all people in UK-registered defined contribution pension schemes as well as those already in income drawdown arrangements.
The Government's aim, it says, is to make the tax system simpler by removing unnecessarily restrictive and outdated rules. With Thursday's rule changes, it seems to have succeeded although some warn of problems ahead.
"By scrapping compulsory annuitisation rules, the government can now encourage more investors to commit money to their pensions," says Tom McPhail, pensions expert at Hargreaves Lansdown. "This means that even though the flexible drawdown will only be open to relatively few (50,000 at outset and then 12,000 a year according to Treasury estimates), nevertheless these reforms will indirectly benefit many more."
He says the move will encourage more retiring investors to adopt a mix and match approach to retirement income. "This new model of retirement involves using an annuity to deliver a core income to cover essential expenditure and a drawdown plan to deliver a flexible income on top," McPhail explains.
Scrapping compulsory annuitisation is long overdue, according to Joseph Clark of wealth management firm No Monkey Business. "Increased flexibility is a good thing for some wealthier people, who will be able to structure annual income in a more efficient manner," he says. "The pension level can be drawn at a tax-optimal level, after consideration of other elements of the client's portfolio."
Julian Webb of Fidelity Investments also welcomes the increased flexibility of the new rules. "This is good news as it gives those who have been able to accumulate a big enough pension pot the flexibility to use their savings in a way that best suits their circumstances as they change throughout retirement."
But critics say the move is only likely to help the wealthy. That's based on the fact that people will only have the flexibility to drawdown an unlimited income if they can prove they have a minimum lifetime pension income of at least £20,000 a year. However, the income can include the state pension, income from a final salary pension and annuities.
"It's true that most people will still need to buy an annuity as they will not have saved enough to provide an adequate income for their retirement," says Julian Webb. "However, as the move from final salary pension schemes to defined contribution gains momentum, increasing numbers of people in the future may accumulate a pension pot big enough to give them this choice."
Ros Altmann, Saga's director general, says the Coalition's move will mean tax cuts for the wealthiest while the less wealthy will be forced to pay more tax. "It is far more important to help the middle classes secure a better deal on their annuities and I am calling for reform of the annuity sales process to ensure all pension savers have a better chance of getting the right annuity at a good rate," she says.
Michelle Mitchell, Age UK's Charity Director also warns that the new rules could cause problems.
"The risks include the mis-selling of complex and expensive products, damage to the annuity market, and real hardship for many pensioners in the future," Mitchell says. "The government must ensure that anybody considering new ways of drawing their pension is fully informed of the potential risks and costs."
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