“Let me be clear. No one ever needs to buy an annuity again.” With that one sentence, chancellor George Osborne introduced the most sweeping changes to pensions for over a generation. The 2014 Budget brought change of such magnitude that nobody could have foreseen. Before that Budget, more than 90 per cent of people bought an annuity with their pension savings. That number is already falling dramatically. In the first quarter of 2014, 74,270 annuities were purchased but by the second quarter, sales had fallen to 46,368.
Six months later there is greater clarity on the detail of what that bold statement actually meant. However, we will still need to wait for the Autumn Statement on 3 December for detail on important matters such as the rate of tax on pensions in payment at death (tipped to fall to the current rate of inheritance tax or even lower).
As insurers and annuity providers were swiftly identified as the Budget losers, Sipp providers were earmarked as potential winners. Sipp providers have proven experience in already offering drawdown, and generally coped well with the legislative change that introduced it. In recent years they have coped with varying Government Actuary’s Department (Gad) limits as well as replacing unsecured income and alternatively secured pension (ASP) with capped and flexible drawdown. In contrast the scale of work facing more traditional pension providers – who are accustomed to the accumulation phase only – poses an immense challenge.
The new pension income options
April 2015 will see increased flexibility for pension income. The option to buy an annuity remains and, despite immediate reaction post-Budget, is likely to still prove a popular choice for part – or all – of many savers’ pension funds. It is worth mentioning that lifetime annuities are also seeing some changes from 6 April 2015. The annual level of the annuity will be able to reduce as well as increase in value. The 10-year limit on guarantee periods will also be removed, enabling the choice for the annuity to continue to be paid for however long the annuitant chooses at outset.
A simple overview of the two key new options shows:
Flexible Access Drawdown (Fad): Fad is likely to be the default option for those who choose not to buy an annuity. It is akin to flexible drawdown today, with no minimum income requirement and the new ability to continue to contribute up to £10,000 per annum (although carry forward may not be used). There are no restrictions on when and how much of the pension fund can be withdrawn, but the investor must pay income tax on those amounts.
Uncrystallised Funds Pension Lump Sum (UFPLS): UFPLS is a lump sum paid directly from uncrystallised funds, with 25 per cent usually tax-free with the remainder taxed as income. UFPLS will also include payments from money purchase arrangements which would currently be termed as trivial commutation lump sum payments. To qualify for a UFPLS, an individual must have available lifetime allowance and be aged 55 or over. UFPLS cannot be used by those with protected tax-free cash under primary and enhanced protection, or by some others with lifetime allowance enhancement factors.
In addition, capped drawdown remains for those who already have it. Investors can keep capped drawdown provided their withdrawals do not exceed the current limits. In return they keep an annual allowance of £40,000 as well as the facility to continue to benefit from carry forward. Should withdrawals exceed the limits then the fund will be converted to flexible access drawdown (Fad) – no subsequent limits will apply to withdrawals but the annual allowance will reduce to £10,000.
