The Treasury consultations regarding the proposed pension rule changes are due to come to an end on 22nd July, and any news on further sweeping amendments to the current scheme is likely to leak out in the coming months.
The main point of conjecture – and one which is viewed by some as potentially damaging and disruptive, and others as both liberating and extricating – is the proposal that pension savers will be able to take their pension in any way they want to, by April 2015. Either as a 100% lump sum, in drawdown/investment mode, or in the same annuity-purchasing way with which we have become accustomed (this option is the least likely to be favoured).
Should the legislation be pushed through without objection, from age 55 the option will be there to be able to withdraw the pension in its entirety – with 25% tax free, and the remainder being subject to the marginal rate of income tax for that specific year.
100% Concerns
This particular proposal has created much disquiet among fellow EU members – fearful that the vast majority of UK pension holders will most likely draw their entire pension the moment they can, and will subsequently face financial difficulties later in life as they go on to spend their savings somewhat prematurely.
Should this be the case, and the retiree require medical care as the years roll on for example, the UK will have to foot the bill. With the economy barely in recovery mode as Britain attempts to get up from its knees, it is thought that this ‘incentive’ for UK pensioners could be somewhat ill-timed.
You can see the point here, however from the government’s point of view, it makes an amount of sense to offer the freedom of choice to those who have responsibly invested for so long.
Annuities Obsolescent?
Firstly, having monopolised the market and essentially called the shots for as long as anybody can remember, the government, it would seem, has finally run out of patience with annuity providers. The requirement to buy an annuity may only just have been scrapped, but it was a long time coming.
Perhaps the most frustrating aspect of being cajoled into the purchase of an annuity upon retirement from a consumer perspective, was the unswaying rigidity of the product. Most notably the fact that if another provider’s annuity was out-performing their own, and the customer wished to switch in order to reap the rewards of better investment choices by the fund management: No chance.
So now annuity providers will be looking at ways to make up for their previous short-sightedness to try to convince savers that their products are still a viable option. They will surely be looking at offering product flexibility with regard to:
- Investment choices
- Income options allowing withdrawal in certain circumstances
- Ability to cancel or switch annuities without exorbitant fees
- Investment in technology to allow instant access to product and all information required from the consumer point of view
One thing is for sure, the ivory towers will not be a pleasant place to be over the coming months. Even if annuities were radically changed to accommodate the appetite the British consumer has for freedom of choice (which they won’t obviously), annuities have received a crippling blow from which they may never recover.
Hidden Agenda
On the face of it, the fact that a Conservative-led coalition government has made these freedom-giving proposals a year before a general election must also be taken into account. The demographic this affects is coincidentally the same one which predominantly makes up a large proportion of the embarrassing 30% of those expected to bother to vote. As much as immigration and cut-backs remain an issue for some, if there is all of a sudden a 100% withdrawal allowed on savings which were pretty much written off as being only available on a drip, it’s clearly going to assist in the quest to win favour amongst the floating voters – for whom the idea of Ed Miliband is as unpalatable as UKIP.
Don’t Leave
The final aspect of consideration must surely be the desire to keep as much capital within the UK economy as possible. As we all know, more UK residents than ever before are jumping ship for warmer climes, better lifestyles and a fresh start. If they are taking their savings with them – and the options are certainly there for them to do so – this will result in invested capital leaving the UK’s shores, meaning the pension deficit (which currently stands at over one hundred billion pounds) will increase further.
Qualifying Recognised Overseas Pension Schemes (QROPS) have offered British expatriates the kind of freedom and flexibility in savings that George Osborne has only just proposed for those still in the UK.
Expat Implications
Since 2006, expats have been able to transfer their UK-based pensions into overseas schemes which have afforded favourable tax (income & inheritance) conditions, investment and currency options to the saver. Although historically no figures have ever been released by HMRC, it is thought that in 2013, the QROPS industry became a billion-dollar one.
QROPS providers are also looking over their shoulders during this period of consultation, expecting that they will almost certainly be dragged into the reforms somehow. Many are speculating that if the government pushes through the 100% lump sum withdrawal option, QROPS may struggle to retain its popularity, however the most likely scenario – should this legislation come into effect – is that QROPS rules will change to mirror those of the UK.
This has generally happened so far with the scheme, and despite the fact that it is not compulsory for a QROPS to perform in the same manner as a UK pension (otherwise there would really be no benefit to a QROPS), a change like this is more or less bound to be mirrored by QROPS.
If it is, then a QROPS suddenly becomes even more attractive as a proposition. For example an expat living in the UAE will benefit from being able to transfer their pension/s into a QROPS, and upon hitting 55, will be able to draw the entire amount of capital tax-free. Those with QROPS in the Isle of Man, Malta, Ireland, New Zealand, the Channel Islands and Gibraltar (to name a few), will also benefit from a lower tax rate on their withdrawal than if their pension was left in the UK.
Mirrored by Design
At this time, QROPS rules state that a minimum of 70% of the transferred funds should be designated for the provision of an income for life, and the funds may not be accessed until the age of 55. This mirrors the UK pension regulations. QROPS providers will expect this to remain the case if the UK allows 100% instant access.
If access is granted in this manner, the government has promised to make free expert advice available to those considering the best course of action to take. Most would assume that any knowledgeable advisor would discourage participation in the radical amendment being proposed, but although it is not generally recommended that an entire working-life’s worth of savings are drawn in a lump sum and stored under the bed instead of invested, it is undoubtedly nice to have the option just in case.
