Scrapping of annuities in April budget leaves experts reeling

images-iexpats-2014-3-26 (7)Speculation has been rife for the future of the pension industry after Chancellor George Osborne released the April budget for 2014.

Will the new freedoms bestowed to pensioners spell an increase in cruise package purchases? Sports cars? Or will people handle their pensions with care – even if they are not forced to buying into annuities which give guaranteed income for life?

“People who have worked hard and saved hard all their lives, and done the right thing,” the chancellor noted, “should be trusted with their own finances.”

The legislation

In an announcement that has divided the pensions world, the Chancellor has stated pensioners should be allowed to plan their own retirement.

This includes the complete scrapping of the annuity – a product purchased from insurance companies with a pension that guarantees a set amount of income each year for life – and the lifting of heavy taxes for those who wish to take more than the 25% tax-free lump sum when they start retirement.

The new rules will come into force in April next year, and will affect roughly 13 million people who have defined contribution pension schemes.

Pensions Minister Steve Webb praised the move, calling it “a big step forward.” Webb also noted the new legislation allows people to enjoy their retirement how they want – whether they would like to pay off mortgages and debts earlier, splash out on holidays, or help families.

The views

Whilst ministers and pensions experts like Steve Webb have praised the move, many others have taken a more negative viewpoint – stating it is “a policy catastrophe.”

James Lloyd, director of thinktank the Strategic Society Centre, notes “the evidence suggests [pensioners] will sit on their savings with a depressed retirement income, or run out of money altogether.”

He predicts the legislation will remove the “security and peace of mind of an annuity with insecurity and fear” and “will also lead to pretty miserable circumstances for millions of people.”

In a similar vein, some experts worry that pensioners may be too scared to spend their pension income, and instead leave the fund invested in a low-interest account to little avail.

Yet more individuals believe this could have a negative effect on house prices as pensioners seek to invest in the property market.

Others have decided to sit on the fence: “Where people have a choice, about 70% choose to take the cash,” notes Marc Hommel, PWC’s global pensions leader.

“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.”

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