Saga welcomes the additional flexibility that the removal of this requirement provides. However, the average annuity purchase of £24,450 (ABI Statistics Q1. 2010) indicates that average pension pots are likely to be around £30,000. If so, the purchase of an annuity is likely to remain the logical option for many to provide a secure income in retirement.
The capped drawdown option appears attractive because of the ability to leave pension funds to others on death, but it is unlikely to provide an income close to that available from an annuity. This potentially rules this option out for the majority with pension funds beneath £100,000 without other income or capital to live on.
Though the removal of the age 75 barrier to annuity purchase gives increased choice to individuals as to when they retire, it is likely that the majority will still purchase an annuity at an earlier date when they cease employment and require a pension income. However, this gives an opportunity to accrue a secondary pension which could be accessed in later life if long-term care is required in a tax efficient way: if long-term care proves not to be necessary this fund should be allowed to return tax-free to the estate.
The flexibility to take an increased amount from a pension fund if there is sufficient other guaranteed income available is again an attractive feature but is only likely to be helpful to those who need it the least, i.e. those with sufficient additional pensions to pass the MIR.
The ability for value protection to run past age 75 is welcome, but since this may be a costly option whether this proposal has much impact will have to be seen.
Response to questions
Developing a new tax framework for retirement
A.1 The level of an appropriate annual drawdown limit for capped drawdown.
This level needs to be set realistically to ensure that the income can be paid for life without depletion of the pension fund down to state support levels. The level of income should be set according to prevailing annuity rates, but should not be reviewable by age on a yearly basis; instead it should increase with inflation (e.g. LPI) to prevent future increases depleting the fund at a faster rate.
Further consultation is required
A.2 Its intended approach to reforming the pensions tax framework, in line with its commitment to end the effective requirement to purchase an annuity at age 75.
We understand the need for economies, but given that Government is also consulting on limiting the tax relief on pension contributions any such action is likely to depress the pensions and annuity industry and will inexorably lead to lower pension pots on average .Given that the last Government began its career with a notorious pensions raid – the removal of ACT- it is inauspicious that the new Government should start with similar intent.
The return of unused funds to an estate when in capped/flexible drawdown is an added attraction to these schemes. However, a flat tax recovery charge of 55% seems unfair for those who have received just 20% tax relief on their savings.
Minimum income requirement
A.3 What income should be considered ‘secure’ for the purposes of the MIR and whether proposals for the life annuity income that can be considered for MIR are practical and appropriate.
It is essential to ensure that those wishing to withdraw larger amounts from their pension funds will maintain sufficient income to live. Though the consultation paper suggests that this should only include other guaranteed pension income e.g. state pension/defined benefit schemes, this could be widened to also include any capped drawdown benefits that are being taken from any other schemes.
A.4 What an appropriate level for the MIR should be and how the MIR should be adjusted for different ages.
The MIR needs to be set at a sufficient level for people to live on. This will be affected by their location, their age, health and by standard of living e.g the cost of living in a large detached house will be much higher than that in a retirement flat. Calculating one flat rate, though straight-forward will not be suitable for all. The level should be equivalent at least to the guaranteed pension credit as this is the minimum amount that the Government feels someone requires to live on (whether this is so is a different matter!).
The need for income will fluctuate throughout retirement with potentially a large increase towards the end of life if long-term care is required. For those in this position who have not utilised all pension funds, it may be appropriate to allow a further withdrawal from their fund or the use of these funds to purchase an enhanced annuity to pay for care.
A.5 Whether a different MIR should be set for individuals and couples
The answer must be “Yes” as naturally the spending patterns will be different between individuals and couples. Preventing an individual from using flexible drawdown because they are required to maintain an income sufficient to maintain a couple does not seem fair.
A.6 How often should the MIR be reviewed
This should be reviewed on an annual basis in line with fund performance, inflation and income withdrawn. It should also be reviewed on a change of circumstances such as being widowed or change in health.
A.7. How to minimise unnecessary burdens for individuals and industry in the assessment of MIR.
This should be a simple and understandable process to allow on-line assessment and an immediate response. Currently, too few people claim pension credit owing to the complexity of the application and assessment process.It is essential to ensure that people are not put off of the alternatives to an annuity due to misunderstanding the rules.
For more information please contact the Saga Press Office on 01303 771529