Insurance companies and legislators are playing off pension retirement income in a war over strengthening financial controls.
At the root of the argument is a demand from the European Union that insurance companies should strengthen their financial reserves by holding more cash on reserve.
The insurance companies retaliated by saying if that’s what the EU wanted, then the money would have to come from cash set aside to fund retirement annuities – the result would be a cut in private pension payments as UK pension holders must buy an annuity with their pension fund before they are aged 75 or face massive tax penalties.
Now, other European insurance companies are weighing in criticise the scheme and the possibility is EU legislators are wilting under the attack and may water down the proposals.
In the UK, the Financial Services Authority was in favour of the scheme based on running computer models of doomsday scenarios for the economy if a recession hits.
UK insurance companies responded the criteria for the meltdown model were too severe and would cause financial hardship to millions.
Anyone with UK pension rights who lives permanently outside the country can avoid the annuity issue simply by transferring their pension funds to a QROPS – offshore pension schemes sanctioned by HM Revenue and Customs that have no requirement for retirees to buy an annuity.
The transfers cover all private pension funds but not the state pension – so investors with SIPP plans can also benefit from the tax advantages of a QROPS.
FSA managing director of retail markets Jon Pain has labelled the solvency rules a “potential time bomb” for the pensions market.
“The directive poses a significant risk for the pensions market. The nub of the issue arises from the question of whether the legislation will allow firms to continue to take into account a liquidity premium in capital provisions for annuity business,” he said.
“In simple terms, if the implementing legislation does not allow for it, annuity providers are likely to have to significantly increase the capital they hold and as a result increase the cost to consumers.”
