Compulsory annuities to be scrapped

The new coalition government has announced that they are  “to end the rules requiring compulsory annuitisation at 75″.

Under previous rules, members of defined contribution company pension schemes and those with private pension savings must buy an annuity with their pension pot by the age of 75, or take an alternatively secured pension which would see a 10% drop in  income.

Unfortunately for some, annuity rates plummeted last year as a result of the financial crisis leaving those forced to buy an annuity at risk of receiving just half the income they might have expected 15 years earlier, according to the Pensions Advisory Service.

Many had also found annuitisation to be a galling loss of control of the pension fund, meaning that, whilst a widow’s pension can be built in with a reduced annuity rate, anyone who did not live to their age group’s life expectancy would see their pension die with them without seeing the full value in income.

In contrast, those who access their pension income via drawdown rules (through a fixed term annuity or an unsecured pension), which allows access to the pension fund at a rate of 20% greater than an annuity (acknowledging that should the maximum income be taken, fund erosion is inevitable in the long term), retain control of their pension fund and can nominate that the income can continue to be paid to a surviving spouse, or can make up part of their estate less 55% tax.

In conclusion, whilst all routes retain the same advantages and disadvantages, and an annuity will remain the income choice for many, clients are no longer compelled to purchase a annuity and can retain control of the pension fund for income management and estate planning purposes.