Brave new world: is this the end of the annuity?

The words ‘pensions’ and ‘revolutionary’ are  not often to be found in the same sentence,  but the announcement in the March Budget  that anyone over the age of 55 will be able to  take their entire pension pots as cash was,  indeed, revolutionary.

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The words ‘pensions’ and ‘revolutionary’ are  not often to be found in the same sentence,  but the announcement in the March Budget  that anyone over the age of 55 will be able to  take their entire pension pots as cash was,  indeed, revolutionary.

The words ‘pensions’ and ‘revolutionary’ are  not often to be found in the same sentence,  but the announcement in the March Budget  that anyone over the age of 55 will be able to  take their entire pension pots as cash was,  indeed, revolutionary.

Spelling it out in all its simplicity, Chancellor George Osborne said: “Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want. No caps. No drawdown limits. Let me be clear. No one will have to buy an annuity.”

Under the changes, to be introduced in 2015, any amount taken as cash will be subject to the individual’s marginal rate of income tax in that year. Furthermore, the government also plans to raise the age at which someone can take their savings under the tax rules from 55 to 57 in 2028.

The news took the pensions industry by surprise, with many welcoming the move away from the enforced annuity purchases which have received such bad press over recent years thanks to their lack of flexibility, transparency and their dismal returns.

Lamborghini pensions?
But opinion is split over whether the announcement signifies bumper sales for cruise companies and sports car makers, or a belated acknowledgment that people are capable of looking after their own cash in retirement.
“These changes represent a brave new world for retirement planning and it is right that people should be trusted to make decisions on how to spend their own money,” says Annuity Direct chairman Alan Higham, whose company was bought by Fidelity in October.

“The changes will effectively remove the regulatory bias that exists at the moment which means too many people buy annuities at the wrong time and for pretty poor value.”
“The Budget turns the world of pension savings upside down,” agrees Mike Smedley, pensions partner at KPMG. “With almost unrestricted access to pension pots in future, this will radically affect the way today’s workforce saves for tomorrow.”

Although the magnitude of Osborne’s plans is beyond doubt, some commentators feel giving people such freedom over their own savings is dangerous, and many have been left confused by the announcement, particularly with it coming so soon after the roll out of auto-enrolment.

Too much control?
“There’s no doubt that the annuity market in its current form is outdated and ineffective,” says NOW: Pensions CEO Morten Nilsson. “Giving savers greater flexibility over how they access their pension pot is good news. But by handing them complete free rein it feels like the Chancellor is throwing the baby out with the bathwater.
“By introducing auto enrolment, the government acknowledges that there is an inherent lack of interest in pension saving. To expect savers to have sufficient knowledge to make good choices at retirement, feels somewhat counter-intuitive.”

Nilsson’s views echo those expressed by the National Association of Pension Funds, whose chief executive, Joanne Segars, describes the announcement as “perplexing”.

“Automatic enrolment, one of the largest and most successful reforms of workplace pensions ever seen, was introduced to encourage people to make good financial decisions about their retirement, because experience tells us that people are often ill-informed and make poor decisions about financial planning for old age,” says Segars.

“On the one hand the idea that savers can take their pension as a lump sum, albeit subject to tax, may be an incentive to save. However, this choice brings with it a significant burden of responsibility for individuals to understand the choices they are making. We know this is not always the case as people often underestimate how long they will live and overestimate how long their pot will last.”

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