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The Government's aim, it says, is to make the tax system simpler by removing unnecessarily restrictive and outdated rules.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."
- 1 2015 General Election: Green party will not appear in TV debate alongside Ukip – says BBC
- 2 Kentucky gang rape: 15-year-old boy left in critical condition after sexual attack by group at party
- 3 Of course, teenage girls need role models – but not like beauty vlogger Zoella
- 4 North Korean officials 'publicly executed for watching South Korean soap operas'
- 5 Muslims, immigration and teenage pregnancy: British people are ignorant about almost everything
iJobs Money & Business
£20000 - £23250 Per Annum pro rata: Clearwater People Solutions Ltd: Pro rata ...
£40 - 48k + Benefits: Guru Careers: We are seeking a Marketing Manager to join...
£45,000 - £65,000: Saxton Leigh: Our client is a well-known APAC Corporate and...
£60000 per annum: Ashdown Group: Compensation and Benefits Manager - Compensat...
Day In a Page
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000