Budget 2014: Osborne scraps compulsory annuity purchase
The biggest change to pension rules and regulations in a generation has been announced by Chancellor George Osborne in his Budget speech.
The UK life industry was rocked by the news that people with a “defined contribution” pension, whether a private or company pension, will no longer be forced to buy an annuity when they retire.
So unexpected was this announcement that shares in the UK’s big life companies – Legal & General, Aviva, Standard Life and Prudential – plummeted by as much as 15%.
The Chancellor said as people live longer and their needs in retirement become more varied, the nature of retirement is changing.
He added: “With the right consumer advice and support, people should now be able to make their own choice about how and when to spend their pension funds.”
Hitherto, when a person with a defined contribution pension retired, they could take up to 25% of their fund as tax-free cash but were compelled by law to use the remainder to purchase an annuity from a life company.
The annuity would provide an income for life. However, the income stopped when the annuitant died, with those who died prematurely subsidising those who lived longer.
Also, in recent years, greater life expectancy, low interest rates and falling bond yields mean annuity rates have shrunk. This has led to some financial advisers recommending that investors put their money into tax-efficient ISAs rather than pensions.
Previously, people who wanted their pensions paid to them as a lump sum after the 25% tax free cash would be charged 55% tax on this sum before they received it.
In the Budget the Chancellor announced savers will no longer face this 55% penalty charge but will rather be taxed at the “marginal rate” which is currently 20% for most pensioners.
Pensions expert Dr Ros Altman tweeted that annuity sales should now be put on hold to provide time to sort out the annuity market and make it fairer. Dr Altman also expressed sympathy for “those who’ve just bought [an annuity]”.
Ronnie Ludwig, a partner at accountancy firm Saffery Champness, said: “The abolition of compulsory annuity purchase with private pension savings is a huge sea change. Annuity rates have been falling so far and so fast that pensioners have getting fairly miserable returns on their pension savings.”
Richard Jones, annuities director at Scottish Widows, said: “Today’s announcement on annuities will provide welcome flexibility for customers at the point of retirement, particularly those retiring with smaller nest eggs than they had hoped for.
“It is, however, vital that this is not viewed as ‘free money’ as their pot will still be subject to certain taxes. People will still need to ensure they still have a regular income to fund their ongoing retirement.
“Our research shows less than half of people are fully aware of all their options at retirement. This change reinforces the importance of seeking professional advice, where possible, so people know and understand the options available.”