In the most fundamental change to how people can access their pension in nearly a century, the Chancellor has announced a number of changes to the drawdown, trivial commutation and small pension fund limits. The intention is to provide more people with more flexibility to access their pension savings.
One of the most striking, and well publicised of the proposed changes, is that people will no longer ‘have to’ buy an annuity. For a considerable period of time annuities have been considered to offer poor value. Ironically, annuity rates (one of the measures by which they are judged to offer poor value) is by-and-large beyond the control of annuity providers. Annuity rates are typically driven by economic conditions and conditions over recent years have driven rates down. Quantitative Easing [QE] has been a major contributor to it and QE is not something that was dreamt up by the annuity providers; it’s a policy embarked on by the Bank of England at the behest of HM Government in order to try and get the economy moving.
Another key feature of an annuity is its inflexibility. This is something that has long been derided.
Remembering that the proposed changes are still in a consultation period, we hope that by relaxing the rules this unleashes the innovative potential of the annuity providers leading to products with more flexibility and better value.
We believe that annuities still have their place in retirement planning and the need for focussed in-depth financial advice will be even more essential should the proposed changes come into effect. There will be those people who will take their pension fund, spend the money, and worry about it later. For those who don’t spend it, and prefer to use it to supplement their income, there will be many decisions to be made. For example, where will they invest it; how much, if any, Tax will they pay on the income they receive from it, and will the money be at risk?
However, the main question is “when will the money run out?” Unless you know the date of your own death, this is impossible to answer; you will either end up with money left at the end OR you will run out of money. This is a daunting prospect for most.
Without doubt, whilst the consultation process takes its course, the area of ‘at retirement planning’ has just become even more complicated. We welcome change in this area and hope that the end result is positive for consumers and not just a cynical way of accessing higher amounts of Tax for HM Inland Revenue.
Only time will tell.