The Lib/Con government have promised to end compulsory annuitisation for UK private pensions. The question is, when? With leading annuity providers reported to have slashed their annuity rates again, it cannot be soon enough for the quarter of a million or so people who are expected to buy an income bearing product this financial year.
Under the present rules, people with UK private pensions have to purchase an income bearing product (typically an annuity) by their 75th birthday. Opponents to the current regime cite not only the time limit as the problem (although pensioners could be panicked into make a decision at the last minute), but also the paucity of good deals out there to choose from. Prudential, Legal & General and Standard Life are said to be reducing their already-low rates at the moment.
Perhaps the biggest problem with compulsory annuitisation is savers’ reluctance to shop around for a good deal. Financial services firm Hargreaves Lansdown claim that 63% of those who bought annuities in 2009 did not shop around for the best option, and that they may have missed out on the best deal as a result. The research does not reveal whether the lack of shopping around was due to consumer inertia or a sense of loyalty to their current pension provider.
If you live outside of the UK but still have a private UK pension, you could escape the annuity requirement by getting a QROPS. Qualifying Recognised Overseas Pensions were brought about in 2006, when the government made it legal to transfer your pension to an approved overseas scheme without paying UK income tax.
Not only are there obvious tax advantages to a QROPS transfer, but there are also other benefits, including the ability to choose a more flexible regime in which to invest your pension.
Some QROPS countries have already abolished compulsory annuitisation (or never had it in the first place), and others may offer early access to lump sums and a greater choice of underlying assets for the more adventurous pension investor. You may even be able to find a scheme that will permit the inheritance tax free transfer of your assets directly to your beneficiaries on your demise.