4th August 2010

Is retirement about to become more flexible?

Many of you will have seen the HM Treasury announcement on 15 July confirming a short consultation period on the newly proposed legislation to remove the requirement to annuitise by age 75. This is something the industry has generally campaigned for, and the new proposals do appear to bring a strong degree of flexibility.

In summary, the proposals include:

Unsecured Pension (USP) will be replaced and Alternatively Secured Pension (ASP) is to be abolished. All existing plans will be transferred to a capped drawdown after April 2011.

• Under the existing USP rules income payments are limited to 120% of the annuity rate and any lump sum left to the family is taxed at 35% unless there are financial dependants.
• Under the existing ASP rules income payments are limited to 90% of the annuity rate and any lump sum left to the family is taxed at 82% unless there are financial dependants.

Two new types of drawdown are to be introduced regardless of age:

• Cap drawdown - available to everybody although the maximum income available will probably be lower than the current limit under USP.
• Flexible drawdown - provided that a minimum income requirement is met, there will be no limit on the income that can be taken.

Any lump sums left to a family from drawdown (before and after 75) will be subject to a proposed 55% tax charge.
The option to take tax free cash at 25% of the fund at outset remains and it will be possible to take this after age 75.
The value protected annuity option will extend past the age of 75.

Whilst those with larger funds will welcome the greater flexibility of unlimited income drawdown, the sting in the tail is undoubtedly the increase in tax on death under age 75 from 35% to the proposed 55%.

The challenge for advisers will be to deliver more sophisticated advice to clients with modest pension funds who could be tempted to shun guaranteed annuities for the new capped drawdown particularly with any drop in rates from Solvency II.

The security of conventional annuities should not be forgotten and there is undoubtedly a strong future for innovative investment linked and flexible annuities. Close scrutiny of the proposed 55% tax charge for lump sum death benefits shows a significant price to pay for the flexibility over new innovative alternatives, which can provide additional security and may be more attractive.

Origen Retirement Solutions provides a whole of market annuity service to member firms. For further information, read more on the Origen Financial Services Tools & Resources page.

Rob Tinsley
Head of Retirement Strategy
August 2010

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