Tories propose pension flexibility

Wealthy investors will have more control over their retirement funds if the Conservatives win this year’s election, under new proposals that will allow pensions to remain invested in the stock market for longer.

George Osborne, the shadow chancellor, said this week that a Tory government would scrap the rule requiring investors to buy an annuity when they reach the age of 75.

Under current rules, investors have the option of keeping their pension invested in the stock market after they retire and drawing an income from it – known as income drawdown. This approach appeals to wealthier investors with larger pensions, who do not want to hand control of their pension income to a life assurance company, via an annuity.

Income drawdown also allows people to pass on their pension assets to heirs on death.

At 75, investors have to buy an annuity or move into an alternatively secured pension (Asp). However, an Asp comes with high tax charges that are believed to have put many investors off the scheme.

By November last year, only 2,419 people had moved into an Asp since its introduction in 2006.

Pension consultants welcomed the Conservative proposals. “There is no decent justification for forcing investors to buy an annuity,” said Tom McPhail at Hargreaves Lansdown, the financial advisers.

“Changing the rules would send an important message to prospective savers: that they will be able to retain control of the money that they have saved up. This will encourage more people to engage with the pension system.”

However, he pointed out that most people would still buy an annuity, as 88 per cent of pension funds are too small for income drawdown.

Last year, the government introduced limits on pension tax relief for high earners. Consultants have warned that the wealthy could seek alternative savings arrangements.