Budget 2014 pension shakeup could spell the end for annuities market

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The dramatic and far-reaching overhaul of Britain’s pension system has sparked opposing schools of thought in the pensions industry.

Unveiled in Chancellor George Osborne’s budget, the legislation swept away many of the restrictions surround pensions in the UK.

Starting from April 2015, the UK’s pensioners will be able to, in effect, do what they like with their pots, which typically average GBP 30,000.

One of the most talked about piece of legislation surrounds the tax on pensions after a lump sum is taken.

Whilst a pensioner can currently take 25% of their fund as a lump sum upon retirement, they are taxed heavily on the excess. This tax is being cut – meaning pensioners can withdraw their entire fund if they wish to do so.

In addition, the Chancellor stated that “no one will have to buy an annuity” – the product which sees a retirement saver use their pension fund to buy guaranteed income for the duration of their retirement from an insurance provider.

The views

On the one hand pension experts believe knock on effects will include further inflated house prices, splurges on new cars and holidays and could land a near-fatal blow for the UK’s annuity business.

According to Barclays Equity Research, the market will be slashed from GBP 14 billion to GBP 4 billion within 18 months.

On the other hand, investors declared the move was handing back the ability to choose to pensioners; with pensions minister Steve Webb stating it is now a pensioners “choice” if they wish to spend their pension fund then later rely on the state pension.

In yet another opposing viewpoint, many predicted pensioners may be too scared to spend their pot – and instead leave their cash in low-interest accounts to little effect.

Osborne also stated that GBP 20 million was being set aside for pension savers to obtain face-to-face impartial advice for free on how to manage and invest their pension funds.

Life down under

Australia introduced its own version of compulsory workplace saving in 1992, but the legislation does not require retirees to buy into an annuity.

The evidence of what happened in the country may foretell grim news for the UK’s annuity market – as only one in 25 Australian pensioners buys an annuity.

“Where people have a choice, about 70% choose to take the cash,” notes PWC global pensions leader Marc Hommel.

“I’m personally not overly worried about it; you can see insurers lobbying against it, but in practice, people are going to learn to be more responsible with how their handle their retirement money.”

On the other side of the fence sits advisors like James Lloyd, director of the Strategic Society Centre thinktank, who labelled the reforms “a policy catastrophe.”

“The evidence suggests they will sit on their savings with a depressed retirement income, or run out of money altogether [by splurging]. It will also lead to pretty miserable circumstances for millions of people.”

He also stated that the legislation means the “security and peace of mind of an annuity [is replaced] with insecurity and fear.”

Falling shares

Shares in many major annuities providers have dropped in light of the legislation.

Partnership Assurance shares slumped 55% to GBP 01.38.

Royal and Sun Alliance owner Resolution slid down 5% – the biggest drop of a FTSE 100 firm.

Steve Webb dismissed fears over the “death” of the annuity, and told the BBC: “I don’t think it’s the business of the government to try interfere in what happens in families.”

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