Pensions consultant hits out at plans to remove the age 75 annuity requirement saying 99% will not benefit

News - Savings

Written by Ray Clancy

Tuesday, 20 July 2010 08:28

Plans to remove the age 75 annuity requirement in the UK sounds very sensible but it will only help 1% of pension savers and nothing is being done to help the majority, it is claimed.

The move is effectively a tax increase on pension savings for those dying before age 75, according to Ros Altmann, economist and investment banker who advises the pensions industry on policy and strategy.

She also believes that the Financial Services Authority is failing to regulate annuity sales properly leaving millions at risk.

Responding to the recently issued Consultation Document on the issues, she says that those who have pension funds worth around £200,000 or more will be allowed to take money out of their funds, in a flexible drawdown policy, as long they have either bought an annuity or have other pension payments that guarantee they will have sufficient income to always avoid claiming benefits from the State. Having income from sources other than pension savings will not count.

‘This is likely to mean that only people with pension funds above around £200,000, which would generate £6,000 a year inflation linked income, will benefit from the new measures. These reforms will only help the very wealthiest pensioners. And, of course, many of these can already take advantage of the QROPS legislation, which allows pension funds to be transferred offshore without any tax charge,’ Altmann explained.

‘If the aim of this policy change is to help people benefit from greater flexibility in the annuities market and help reinvigorate retirement, surely we should not be focussing only on the top 1% or so of annuitants. Some 99% of people are not being helped and remain at risk of the same inflexibility and potential mis-buying that exists today. For the vast majority, these measures will have no benefit and, in fact, there will be a potential tax increase for many middle income pensioners who die before age 75,’ she added.

She is also concerned about other aspects of the proposals. ‘At the moment, anyone who has already taken some tax free cash or income drawdown, but then dies before age 75, will suffer a 35% tax charge on any funds passed on to their heirs. This consultation seems to propose increasing that tax to 55%. This will affect anyone in income drawdown or unsecured pension who dies before age 75,’ she explained.

People who are wealthy enough to have been able to delay taking any money from their pension fund at all, who die before age 75, can pass the pension fund on tax free. This will remain the case. ‘Of course, those who can afford not to take any tax free cash or income from their pension savings are going to be the very well off who have other sources of retirement income. They will be able to use pensions as a very efficient form of life assurance in case they die before age 75. They will not be forced to take any income from their tax relieved pension savings,’ she said.

And she believes that people have been ‘badly let down by our regulatory system’ and wants the FSA to get tougher. ‘Most people do not know what annuities are, yet when they come to retire, they can be sold this financial product that could be the wrong product at a poor rate, without anyone having to explain the risks to them or help them understand what they are doing,’ she said.

‘The annuity provider is allowed to sell an annuity, and take a fee out of the pension fund, by just sending a letter and asking the customer to tick the box and send it back. There are no proper risk disclosures and no requirement to ensure people have considered the risks of lifetime annuitisation,’ she explained.

‘For example, married men often take the single life annuity illustration and then leave a widow penniless if they die early. Many people in poor health never find out that they could achieve much higher income with an impaired life product than the one they are offered by their pension company. I believe it should not be permissible to sell an annuity to anyone who has not been told what questions are essential to find the right kind of annuity for their circumstances, nor some assistance in finding the best rates. Since Government forces people to buy and knows they do not understand what the annuity is and since it is irreversible, surely Government has a duty to regulate the sale properly,’ she added.