ACCA welcomes the opportunity to respond to HM Treasury's consultation paper on the future of annuities. This response has been compiled with the input of ACCA's Pensions Committee, which comprises senior members of ACCA with long experience of pensions matters from the perspectives of employer, trustee, auditor and financial advisor.
ACCA strongly supports the Government's decision to end the obligation for individuals to convert their defined contribution (DC) pension fund into an annuity by the age of 75. We have long considered that the blanket requirement on this issue is unfair on pensioners, primarily since it makes them and their future retirement income dependant on the annuity rates which are available at the time of annuitisation. To impose a deadline by when they have no choice but to annuitise unreasonably restricts their financial choices and condemns many to a poor rate of return. A further significant drawback with the current requirement is the loss to the annuitant's estate, on death, of the residual value of his fund.
We accept that annuities do have and will continue to have the compelling virtue of providing a guaranteed income for life, and agree that there will remain a prominent place for them in the framework of UK retirement provision. But the introduction of more flexibility into the rules relating to DC pensions will provide the opportunity, for those individuals who wish to exercise it, to exercise more control over how their pension savings are used, both during their retirement and after their death.
This initiative by the Government is especially welcome and logical given the light of the seemingly definitive swing away from defined benefit schemes to DC schemes.
Q1. The level of an appropriate annual drawdown limit for capped drawdown
The appropriate level will need to take into account the possibility, under the new arrangements, that individuals will retain their capped drawdown plans for the rest of their lives. It will also need to take into account the additional freedom to be afforded to those with larger funds who can demonstrate additional regular sources of income.
Q2. The Government's intended approach to reforming the pensions tax framework
As stated above, we fully support the policy decision to remove the requirement to annuitise by the age of 75. We also endorse the rationale of continuing with the EET approach, whereby the recovery of tax on pensions is deferred until after retirement.
We believe that the new arrangements offer a very significant benefit to savers in that they will have greater freedom to bequeath the residual value of their funds to their dependants. The opportunity they will have under the proposals is to use their residual funds to provide a pension for those dependants. We see this as a significant opportunity to encourage pension saving and to make it attractive both to the current generation of savers and the next. Savers should be able to bequeath their residual funds to their surviving spouse, who should in turn be able to pass those funds on to their children.
Q3. What income should be considered 'secure' for the purposes of the MIR?
We agree that income from state pensions and inflation-linked occupational pension schemes can be regarded as 'secure' income for the purposes of the proposed MIR.
Q4. The appropriate level for the MIR
Setting a uniform figure for the MIR is problematical since different people will have different needs and differing entitlements to state support. It would be unfair not to recognise, for example, the special needs of disabled people. The alternative, though, to assess the MIR on an individual basis is likely to be unworkable. Therefore, an approximation of the spending needs of an individual or couple needs to be made which enables higher needs to be factored in.
Under paragraph 1.4, the paper suggests that the Consumer Financial Education Body will be directed to provide a national financial advice service which will also offer individuals and families an annual financial health check. There is nothing wrong with providing as wide a range of information as possible on investment choices. But the point needs to be made that there is no substitute for financial advice provided by a qualified and regulated adviser who is in full possession of the client's circumstances.
One additional point which suggests itself, following the removal of the age-related requirement on annuities, and also the Government's current consultation on the default retirement age, concerns the restriction on tax relief on pension contributions once an individual has reached the age of 75. If there is to be no upper age limit on employment, and indeed if it is Government policy to encourage individuals to remain in the workforce for as long as they are able to (and to defer the drawing of their pensions), there would seem to be no convincing reason why older workers should be prevented from continuing to make pension contributions on the same basis as their younger colleagues.