Pension Annuity Flexible Innovation Coming

Pension Annuity Innovation On Way.

We said a few months ago, and we have said this to many clients looking to defer retirement decision, that you may have to sit tight and wait to see how the pension market develops over the next few months and years.

Announced in the budget, it has been well documented that flexible pension drawdown will be available to all, not just some people with guaranteed pensions of £12,000 pa +, from April 2015.  There are essentially two options at retirement 1. Annuity (a guaranteed income for life) 2. Drawdown.

In a calculated move, HM Treasury has confirmed that it is now also to makes pension annuities more flexible and attractive to savers given that annuity rates are currently low and can be restrictive.

Annuities are still right choice for many at retirement given that they are lower risk and guaranteed income for life.  The downside is low rates, no funds left on death and inflexibility, this needed to be amended.

Annuity Rule Changes: 

New Decreasing Annuity Option

Currently, level and increasing pension annuities are allowed.  People are not attracted to these given low rates.  That said, this move recognises that people want greater income when they are younger and perhaps need less as they get older and slow down.

Extend 10 Year Guarantee

Many pension annuities when you start your pension, offer a 10 year guaranteed annuity period which is the maximum that can be offered.  The proposals are that longer guaranteed annuity periods will be available.  This will encourage people to target this meaning that beneficiaries will continue to receive guaranteed pension payments for more than 10 years.  Why is this important?  If you secure a pension income annuity rate of 5% pa, you must live for 20 years just to break even and only just receive the original capital back (20yrs x 5%pa = 100%).  Even of you select a 10 year guarantee period, this would only mean that the guaranteed pay out is for the first 10 years pension payments, so if you die after 5 years, only 5 years of further payments are guaranteed.  This is a 50% windfall for the insurance company.  It makes absolute sense to allow longer guaranteed periods so that people can be secure in knowing that if they die prematurely, their loved ones will get back real value on the pension. That said, 100% spouses benefits are already available.  There is also a proposal to allow lump sum guaranteed on death payments.

Drawdown Annuities

It has also been proposed that even if you opt for an annuity, you will be allowed at a later date to withdraw further lump sums.  We assume this would mean the annuity would fall i.e. be adjusted to reflect that further capital had been withdrawn. Again, we see this as a positive move to encourage guaranteed income annuities but also for people to know that they can access capital if needed.

Comment

We are extremely pleased with the Treasury’s announcement.  Offering greater ‘at retirement’ flexibility both for drawdown and annuity is a well thought out move by Government and can only encourage more people to save.