Thursday 27 January 2011

No more compulsory purchase

Britons are set to enjoy greater financial flexibility during retirement under draft legislation released by the UK Treasury ahead of the 2011 Finance Bill. From 6 April 2011, individuals will no longer be forced to buy an annuity by the age of 75 with the money that they have saved in their personal pension scheme. Instead, they will have the additional option of continuing to save or moving to a drawdown arrangement in which their pension pot is left invested and money is drawn out. Nevertheless, the measures include restrictions, notably the amount of money that can be withdrawn from a personal pension scheme at any one time. This will be limited to 100% of the equivalent single-person annuity that could have been bought with the funds in their pension pot. This restriction is intended to prevent individuals from withdrawing and spending all the money in their pension scheme and then calling on the state to support them. However, individuals can withdraw more than this amount if they can prove that they receive pension income of at least £20,000 per year. In this case, they can take out as much as they like. The increase in flexibility will end a rigid system in which individuals are forced to buy an annuity by the age of 75, even when annuity rates are particularly poor. An increase in life expectancy and an environment in which older people work for longer have made the 75-year cut-off appear progressively more unrealistic and draconian. Treasury figures show that 450,000 individuals bought an annuity in 2009, while 200,000 people are in income drawdown arrangements. According to Treasury figures based on data from the Financial Services Authority (FSA), approximately 50,000 people who are currently in drawdown arrangements could benefit from flexible drawdown, while an additional 12,000 people could access flexible drawdown. The National Association of Pension Funds (NAPF) has welcomed the additional flexibility, but also believes that the new rules are most likely to benefit those with large pension pots and multiple income streams. Many people are still likely to choose to purchase an annuity, which will provide a fixed income over their remaining lifetime. Moreover, NAPF warned that most people are simply not saving enough into their pension schemes, and urged the government to do more to encourage and support strong occupational pension schemes and “creative, flexible” ways for individuals to save for their retirement.

Time to take action

Total UK personal debt had reached £1,454 billion by November 2010, according to figures from Credit Action – more money than the whole country produces in a year and a sum that equates to around £8,500 per household. Contrast that with the nation’s current savings levels, which have seen the average household save just £996 over the last 12 months – or £2.73 a day. However, in an environment where it has become the norm and, until recently, all too easy for individuals to make purchases with debt, changing this ‘enjoy now, pay later’ mentality is going to be difficult. You may be sure, however, that the coalition government is keen to encourage such a change. Work & Pensions Secretary Iain Duncan Smith has been quoted as saying: “We do not save enough in this country…it is appalling, and changing the culture is critical”. Right now, the main incentives to encourage such saving involve limiting the amount of tax you pay on certain savings products. Certainly, the Government needs to do more if they are going to generate the kind of interest that will push more people to act. Yet, if there was ever a good reason to start changing our behaviour, it is surely the fact it costs the average household £2,500 a year in net income just to meet its interest payments. That is approximately 15% of the average net wage going to lenders that could otherwise be heading into our pockets. That fact really should be an incentive to start saving.