More pension savers – and not just the very wealthy – stand to benefit from proposed changes to the annuity rules announced by the government last week, according to independent advisers.
Under what has been described as a “radical” shake up of pension rules, from next April savers will no longer be required to buy an annuity at age 77 and will have more flexibility in the way they can take an income from their accumulated funds.
Buying an annuity is still likely to be the option chosen by most – for the guaranteed level of annual income it provides. But for those preferring to defer or avoid buying an annuity, the current rules that
apply pre- and post- age 77 are to be scrapped – and replaced with two new options for drawing cash direct from a pension fund, from April:
● “Capped” drawdown, allowing limited annual withdrawals from age 55, for the whole of retirement.
● “Flexible” drawdown, allowing unlimited sums to be withdrawn from a pension fund, provided the investor has enough other income to meet a Minimum Income Requirement (MIR), – proving they will not exhaust their pension fund and fall back on the state.
This MIR level is now subject to consultation, but some commentators have already suggested it will be so high that flexible drawdown will only be available to the wealthiest 1 per cent of pension savers.
Dr Ros Altman, an independent policy adviser, estimated that only people with pension funds above £200,000 would benefit from the new measures.
But, this week, other retirement advisers suggested that flexible drawdown could be within reach of many more people than was first thought – because income to meet the MIR can be come from a variety of sources.
“Any pension income that is, effectively, guaranteed and escalates by at least LPI (limited price indexation) should qualify,” says Nigel Barlow, head of research at Just Retirement, the specialist advisers.
“Anyone with basic state pension, second-tier pension and an occupational defined-benefit or escalating annuity should be well placed.”
Other advisers calculate that if the MIR is set at £10,000 a year, then it would put flexible drawdown within reach of many.
“The basic state pension is £5,000 for an individual and, in addition to this, you could have made additional contributions if have worked all your life which might add another £3,000
to the MIR calculation,” says Laith Khalaf, pensions
analyst with Hargreaves Lansdown, the independent financial advisers. “That takes you closer to £10,000 a year. You may also have a further £2,000 from other pensions, such as a defined benefit scheme.”
The government is still seeking views on an appropriate MIR but indicated in its consultation document that it expects only 8,000 individuals will be able to access flexible drawdown.
However, individuals whose funds sizes were insufficient to significantly exceed the MIR would still have options later in life under the new rules (see chart).
Individuals could also boost their chances of qualifying for flexible drawdown by buying an enhanced annuity, offered to those in poorer health or who are smokers. “At present, an enhanced annuity can provide an uplift of up to 39 per cent on income,” says Barlow of Just Retirement.
“For those in serious ill-health, an uplift of 53 per cent is possible. For those in very serious ill-health (impaired life), the uplift could be even more.”
Although the key pension rule change concerns the purchasing of an annuity with the proceeds of a
money-purchase or personal pension, there might also be “exciting opportunities” for those in final-salary schemes.
“For final-salary schemes, this opens the possibility of allowing members to exchange a potentially large proportion of their pension for a lump sum, whilst retaining a small pension from the scheme sufficient to meet the minimum income test,” says John Broome Saunders, actuarial director at BDO Investment Management.
With the detail of the new rules still subject to consultation, and not due to be introduced until next April, investors approaching 77 are being advised to “hold fire” on making decisions.
“People who are in drawdown, or alternatively secured pension, should not make any further decisions until they know what the changes mean for their strategies,” says Stephen Etherington, partner with PricewaterhouseCoopers.