ENHANCED FLEXIBILITY FOR ANNUITY PRODUCTS UNDER NEW PENSION REGULATIONS
PENSIONS – PENSION REFORM 2014/15
Synopsis: As a result of increasing the flexibility with which people can take retirement benefits from DC schemes, the Government will be easing the tax rules to enable product providers to develop new retirement income products that more closely meet the new needs of those who are retiring.
Date posted: Wednesday, July 23, 2014
As part of it’s intention to increase the flexibility with which people can draw retirement benefits, the Government is keen that the tax system should not restrict product providers in developing new products that are suitable for people drawing benefits in the new 2015 environment. They therefore believe the tax system should be modified.
The current tax legislation recognises two broad categories of retirement income under registered pension plans
• Lifetime Annuities. Here the tax rules governing lifetime annuities are prescriptive and relatively inflexible. As an example, payments made under a lifetime annuity are not permitted to decrease (except in specified circumstances) and lump sum benefits cannot be drawn.
• Income Drawdown (both capped and flexible). The tax rules governing drawdown are significantly more flexible, particularly with regard to flexible drawdown which, subject to certain income safeguards being satisfied, permits complete withdrawal of the fund. Of course, complete drawdown flexibility (without income safeguards) will be available from 6 April 2015
The Government take the view that annuities will remain the right choice for many at some point during their retirement, and believes that many people will still value the security of an annuity. However, they believe there is a clear demand for more flexibility to allow new products that meet and compliment the changing nature of retirement.
Having consulted extensively on this issue, the Government believes that in order to allow innovation, many of the restrictions in the tax rules and pensions legislation need to be removed. The Government understands that by relaxing the rules governing annuities product providers would be able to develop a number of new and more flexible annuity products. The changes set out below will enable providers to create new types of annuities that more closely meet customer needs, as well as creating new products through the drawdown rules.
With this in mind, the Government intends to change the current tax rules in order to:
• allow lifetime annuities to decrease. This will provide significantly more flexibility in the design of the product. Providers will be able to offer products which meet individuals’ needs more closely, for example by allowing annuity payments to reduce once an individual becomes eligible for the State Pension
• allow the lump sums to be taken from lifetime annuities. This would be subject to the condition that this is specified in the contract at the point of purchase. This will allow providers to structure much more flexible products that are capable of meeting specific circumstances, such as the need to meet the cost of care
• remove the ten-year guarantee period for guaranteed annuities. This will allow payments made to beneficiaries from guaranteed annuities to continue beyond the current ten year maximum. It will also allow providers to create annuities that ensure more of an individual’s fund is returned to their families in the event of their death
• allow payments from guaranteed annuities to be paid to beneficiaries as a lump sum, where they are under £30,000. This will allow beneficiaries to receive pension payments as a lump sum if they wish, rather than having to spread these out over several years
Given that from April 2015 more people will be able to access their pension funds the Government expects that the retirement income industry will develop a number of new drawdown products, which take into account the greater volumes of people seeking to buy them alongside the broader variety in fund sizes used to purchase them.
However, the Government wishes to protect consumers in the new innovative and flexible system. It will therefore work closely with the Financial Conduct Authority (FCA), the Prudential Regulatory Authority and the Pensions Regulator to ensure that the regulatory regime is sufficiently robust to protect the interests of consumers.
This is good news for product providers. There will inevitably still be a place for the annuity in the new world of flexible pension withdrawal but some of the annuity rules considerably limit flexibility and appeal. These proposed changes will free up providers to offer annuity products that can truly meet the financial needs of customers in retirement in a flexible way.
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