UK - The impact of the current financial turbulence on the value of pension funds may lead to the temporary removal of a rule which forces UK citizens to purchase an annuity at the age of 75.
Chris Grayling, shadow secretary of state for the Conservative opposition party, has called for "emergency pension protection" that involves the "immediate suspension of the rule that forces people to lock themselves into long-term pension arrangements either on their retirement date or their 75th birthday".
The UK government has now admitted it is keeping "all policies under review" in light of current investment market performance.
Under UK regulations, when a pensioner retires they can opt to annuitise immediately, defer their pension or take income drawdown, or unsecured pension (USP), until they reach the age of 75.
Once they reach 75, the law requires them to either annuitise or continue in drawdown, known as Alternatively Secured Pension (ASP), but tax charges introduced by the government on ASP in an effort to stop people passing their money to beneficiaries without paying inheritance tax mean this option is less attractive to retirees with a modest pension pot.
Grayling has claimed the current difficulties in the financial markets means those people who have reached the point where they must purchase an annuity "could end up significantly worse off in their retirement than they would otherwise".
The Conservative Party has previously called for the rule to be removed permanently, although attempts to introduce amendments to this effect in the current Pensions Bill have so far failed.
However, Grayling has now written to James Purnell, secretary of state for work and pensions, to offer the party's cooperation to "ensure people are not forced to make 'once in a lifetime' decisions in a time of great financial uncertainty".
He added: "It makes no sense to penalise someone whose birthday happens to fall within the current period of extreme turbulence."
In response, Rosie Winterton, the newly-appointed minister for pensions reform, said the government "understands that people are concerned about their pensions following the recent falls in share prices".
She added: "Given the current turbulence in the markets it makes sense that we keep all policies under review to ensure pensioners and people saving for their retirement are protected."
Winterton also acknowledged the opposition party's offer of co-operation, and said the Department for Work and Pensions (DWP) has "worked very closely with stakeholders to deliver a consensus in the important pensions issues over recent years and in these times, we continue to be keen to meet opposition parties and industry experts to discuss their concerns".
Following the Conservative call for suspending the rule, Geoff Tresman, chairman of Punter Southall Financial Management, claimed there are "many thousands, if not tens of thousands of people who are approaching retirement age and who are being forced to cash in their pension funds and buy an annuity".
He pointed out this includes both those who have previously opted for income drawdown, and members of defined contribution (DC) schemes who take tax free cash and then must buy a pension with the remaining fund, as although ASP "is an option for many, a far greater number of people do not have funds that are of a sufficient size to justify or warrant income drawdown".
Tresman argued: "It is quite obscene for the legislation to be so inflexible particularly at a time when values have fallen by up to 30% and in some cases 40% over the past 12 - 18 months. To rub salt further and deeper into the wound, annuity rates are falling as interest rates fall and are likely to fall further over the foreseeable future."
Instead, he suggested income drawdown should be made available to everyone regardless of age, while the rule to buy an annuity at age 75 should be removed and replaced "with a more flexible and coherent strategy that would protect the individual and, in the medium- to long-term, the tax revenues of the Treasury".
"It is unacceptable that this scenario should continue and the government should introduce immediate legislation to enable those people coming up to retirement to access their tax free cash and source income from the remaining funds without requiring them to purchase an annuity," added Tresman.
However, David Marlow, director at the Alexander Forbes Annuity Bureau, pointed out annuitisation at age 75 is not compulsory, as pension savers with total funds of around £100,000 and above, have "several different options to consider".
These include taking a phased annuity, examining some investment-linked options so the fund can continue to grow after retirement, or the choice of income drawdown through USP and ASP.
Marlow argued: "Despite saving in a pension for the majority of their working life, few people really take enough time to consider all the options available to them at retirement. Whether the annuitisation age is 65, 75 or 85, the real issue here is to make sure that those approaching retirement consider all of the options available to them and get the best possible income for their fund."
If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com
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