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Home » Pension Advice, Retirement

No more compulsory purchase annuity

Submitted by on August 8, 2011 – 8:51 pm

Pension changes

Britons now enjoy greater financial flexibility during retirement thanks to legislation advanced by the UK Treasury. Until the June 2010 Budget, pensioners were forced to buy an annuity by age 75 with the money they had saved but which still remained in their personal pension scheme. That age was briefly been raised to 77 but now the Coalition has agreed the legislation, compulsion has been removed completely and pensioners can now decide for themselves how long to leave their pension fund invested and at what age (if ever) they wish to make that annuity purchase.

The legislation does include restrictions, notably the amount of money that can be withdrawn from a still-invested personal pension in any one year. This will be limited to 100% of the equivalent single-person annuity that could have been bought with the funds, a restriction which is intended to prevent individuals from withdrawing and spending all their money and then calling on the state to support them. However, individuals can withdraw more than this amount if they can prove that they receive pension income of at least £20,000 per year. In this case, they will be able to take out as much as they like.

The increase in flexibility will end a rigid system in which individuals were being forced to buy an annuity to a deadline even if annuity rates were particularly poor. An increase in life expectancy and an environment in which older people work for longer have made the original age-75 cut-off appear progressively more unrealistic and draconian.

Treasury figures show that 450,000 individuals bought an annuity in 2009, while 200,000 people are in income drawdown arrangements. According to Treasury figures based on data from the Financial Services Authority (FSA), approximately 50,000 people currently in drawdown arrangements could benefit from the flexibility and an additional 12,000 people could now start using it.

The National Association of Pension Funds (NAPF) has welcomed the prospect of additional flexibility, but also believes the new rules are most likely to benefit only those with large pension funds and multiple income streams. Most people are still likely to choose to purchase an annuity, as this will provide a predictable, fixed income over their remaining lifetime, regardless of market movements which might adversely affect money which remains invested in a pension scheme. More importantly though, the NAPF warned that most people are simply not saving enough into their pension schemes, and urged the government to do more to encourage and support strong occupational pension schemes.

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