MSE News: High earners given greater retirement options

This is the discussion thread for the following MSE News Story:

"The elderly will no longer be forced to use their pension savings to buy an annuity by the time they are 75, the Government confirmed today ..."
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  • edited 16 July 2010 at 2:54AM
    jamesdjamesd Forumite
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    edited 16 July 2010 at 2:54AM
    The HM Treasury consultation is "Removing the requirement to annuitise by age 75". It's a singularly misnamed document, since it seems to be proposing compelling annuity purchase by those who take pension income from age 55, not just 75. It appears that it could cause me to greatly reduce the use of pensions in my retirement planning, because they wouldn't efficiently provide income when it's needed most, notably before the state pensions start.

    Through the minimum income requirement that can only be secured with annuities and state pensions it seems to be proposing a substantial decrease in flexibility that will require lifetime annuity purchase where that is not currently required, both from early retirement at age 55 onwards, when they are horribly inefficient, and above 75 when an ASP can currently be used. Lifetime annuity purchases are particularly inappropriate for those retiring before the state pensions start, when a key need is for higher income that can end once the state pensions begin. Under current rules, income drawdown from a pension can partially meet this need because income drawdown at rates that can't be sustained for life is possible, reducing once the state pensions begin.

    The proposal to introduce the minimum income retirement at age 55 is something that could devastate the early retirement plans of many, since inflation-linked lifetime annuities are horrendously inefficient at those ages, taking huge pension pots to buy. Yet the income needs greatly reduce as soon as the state pensions and work pensions commence.
  • chucknorrischucknorris Forumite
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    Does anyone know (or have an inkling) if this 'minimum income' that is referred to is 'all' income or merely income locked within your pension? I ask because my wife and I do not have very large pensions we do however have significant savings/investments that will provide very good income, but I'm not sure if the gov would be worried that as these are spendable rather than locked away in a pension and therefore not count this income in their calculations?
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  • hugheskevihugheskevi Forumite
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    It appears that it could cause me to greatly reduce the use of pensions in my retirement planning, because they wouldn't efficiently provide income when it's needed most, notably before the state pensions start.
    As I understand it, income drawdown as currently exists will still be in place. There will just be an additional option put in place above the existing drawdown arrangements. Although I agree with you about needing it most before State Pensions start.
    Through the minimum income requirement that can only be secured with annuities and state pensions
    Occupational pensions will also be fine.
    Does anyone know (or have an inkling) if this 'minimum income' that is referred to is 'all' income or merely income locked within your pension?
    Any income which is guaranteed for life and increase by at least Limited Price Indexation (which will be CPI capped at 2.5%).

    So income in, say, a S+S ISA would not qualify. A flat-rate annuity would not qualify. An annuity with escalation of 2.5% every year would qualify.

    This means that you are basically looking at State Pension, occupational pensions or annuities to constitute the minimum income.
  • chucknorrischucknorris Forumite
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    hugheskevi wrote: »
    Any income which is guaranteed for life and increase by at least Limited Price Indexation (which will be CPI capped at 2.5%).

    So income in, say, a S+S ISA would not qualify. A flat-rate annuity would not qualify. An annuity with escalation of 2.5% every year would qualify.

    This means that you are basically looking at State Pension, occupational pensions or annuities to constitute the minimum income.

    Thanks, no good for me then, I won't bother paying anything into my pension
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  • jamesdjamesd Forumite
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    hugheskevi wrote: »
    As I understand it, income drawdown as currently exists will still be in place. There will just be an additional option put in place above the existing drawdown arrangements. Although I agree with you about needing it most before State Pensions start.
    It doesn't read that way to me. It appears to contemplate greatly limiting the amount of income that can be taken from private pensions at the times when there is the greatest need for it, before workplace DC and state pensions start. Whether that need is deliberate early retirement, illness that limits ability to work or long term unemployment.
    hugheskevi wrote: »
    So income in, say, a S+S ISA would not qualify. A flat-rate annuity would not qualify.
    Yes, those are two of my concerns, as is income drawdown.

    If those are really not acceptable then it's likely that I will greatly reduce my planned use of pensions for income, because the income just won't be available when I need it most. Others may be concerned about BTL or own home property as income sources and those are methods I may well increase my use of, because the income and capital can be available when most needed.

    The problem I'm trying to solve is:

    1. Prior to age 55, ensuring that I have sufficient savings and investments to maintain my lifestyle without having to rely on the state means tested benefits. My lifestyle means an ample spending level of £12,000 including housing costs, of which some £5,000 is rent or mortgage payments. It's entirely acceptable to greatly reduce capital during this phase, because phase 2 comes next and adds more capital and income.

    2. At age 55 pension capital becomes available to generate income so the target becomes sufficient income generatable from non-pension and pension assets to maintain lifestyle. Again, drawing down the capital greatly is acceptable because phase 3 comes next.

    3. Possible further infusion of capital and/or income from workplace pensions. Possible property downsizing as children leave home. Maintaining capital not required because an infusion of income from stage 4 is pending.

    4. State pension age and an infusion of income from the state pensions. Finally, a point at which a minimal income target has to be met without deliberately drawing down capital to zero before, say, age 110, to avoid dependence on the state.

    Caps that don't consider all available income sources prior to state pension age are short-sighted and don't consider the full range of income needs and circumstances. There are minimums but those only need to be set at a level that, once the state pension and DB workplace pensions are in place, would be sufficient.

    If I can't deliberately take higher income prior to state retirement age, I can't rely on that source of income properly, because I know that I may need to draw at a rate that is not sustainable for life before then.

    Worse still, this proposal appears to contemplate more restrictive limits at lower ages, just when less restrictive limits are what is desirable for those doing proper lifetime planning instead of only considering the situation near to and after state pension age.

    The current situation with income caps for drawdown at early ages isn't great, because it limits drawdown rates too much, but it's better than say a requirement to buy an escalating annuity for life when most of the income need only lasts until state pension age and the arrival of £5,000 to £10,000 more income.

    It's pretty ironic that something that's supposed to make pensions more attractive may have exactly the opposite effect by limiting drawing rates to only those that could be sustained for life, when a big part of the problem is generating income to match the state pensions before those start. It would certainly make my own challenge of living decently without depending on the state substantially tougher at the younger ages.
  • edited 16 July 2010 at 12:38PM
    hugheskevihugheskevi Forumite
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    edited 16 July 2010 at 12:38PM
    It doesn't read that way to me. It appears to contemplate greatly limiting the amount of income that can be taken from private pensions at the times when there is the greatest need for it, before workplace DC and state pensions start. Whether that need is deliberate early retirement, illness that limits ability to work or long term unemployment.


    Which sections of the report are you relying on for this interpretation?

    The sections I draw my conclusion from are paras 2.14 and 2.15, reproduced below:

    2.14 The Government will also create more flexibility for people who do not wish to buy an annuity. USP currently allows individuals to take a tax-free lump sum at the beginning of their retirement if they wish, keeping funds invested in a tax-exempt environment while drawing down an income from their remaining pension pot in line with their needs, subject to a prudent drawdown limit. The Government will allow capped drawdown - equivalent to USP extended beyond age 75 - for the whole of an individual’s retirement. This means that individuals will be able to choose how much to draw down annually from their pension pot throughout their retirement (subject to a capped limit), or whether to draw any income at all.

    2.15 The Government will go further than capped drawdown by creating additional flexibility for individuals who wish to draw down more than the capped annual limit. Under this flexible drawdown model, individuals will be able to draw down unlimited amounts from their pension pot, provided that they can demonstrate that they have secured a sufficient minimum income to prevent them from exhausting their savings prematurely and falling back on the state. The requirement to demonstrate a minimum income will apply at the point at which an individual wants to exceed the annual capped drawdown limit. The Government wants to ensure that the requirement to secure a minimum income is transparent and fair and can be implemented without undue complexity or burdens on individuals or business. The design of this requirement is discussed in detail in Chapter 3.

    Incidentally, I have almost exactly the same thoughts as you regards providing for the various pre and post 55/60/65/SPA phases of retirement.
  • jamesdjamesd Forumite
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    hugheskevi, the types of income source that will be ignored and the use of inflation-linked annuities, worsened somewhat by annuities becoming even worse options than they already are for younger people because of the planned increases in capital requirements for pension companies. Also the high values given for the minimum income target examples. And the talk of higher targets at younger ages to reduce investment risk, even though that's the opposite of what you need at younger ages because then the challenge is to replace the still absent state pensions.

    Say you have much of your income expected to come from non-pension sources under current rules. Add that to the state pension income and some non-state pension and assume all is well and you can easily live on it.

    No problem today before the state pensions start, you can draw down on the DC pension at a rate that can't be sustained for your whole life, boosting your income to match at least some of the missing state pension income. Well, some problem today because the GAD limits may not be high enough for full replacement, since they are intended to limit capital reduction and what you need at this stage is deliberate capital reduction.

    Now apply new rules that ignore the other income. Suddenly that DC pension that you could draw on at a high rate has the rate that you can draw at cut back because the calculations now require the income to last for your whole life. Even though you have no need for that, because the other income is there.

    The effect is to cut income when you need it, then when the state pensions start, make you better off than you were before they started, instead of keeping things consistent at a sufficient level before and after they start.

    You can compensate to some degree by limiting how much use you make of pensions, so that the capital you can't draw on at a high rate is minimal.

    Once your total expected income starts to increase to levels well above the minimum you have to have, you can use more pension income because the state pension portion will be a smaller and smaller part of the total income. That in turn means that the portion of your total capital that you need to draw down to cover the missing state pensions portion decreases.

    The effect appears to be to make pensions a particularly poor deal for those with lower income targets, while leaving them as a good deal for high and very high income targets, where the minimum income test is easy to meet even before the state pensions start.
  • So you buy an annuity and then promptly expire. Great for the kids or what? No thanks. That's why I have always used property and ISAs exclusively.

    May have to reconsider now as I am absolutely one of those who has no current interest in pensions whatsoever due to compulsory annuities. They are the worst deal imaginable and the finance industry's last swing at having a good laugh at your expense.

    Mind you... Anything called "a pension" is at the whim of governments also. Who is to say the law would not be changed back to grab my money into some new and more horrible scenario if I put it there now? Will have to think long and hard before I put any money in that direction.

    Even this revisionist thinking by the Libs/Tories screams what I already know - pensions are to protect the state, not to protect me.
  • edited 17 July 2010 at 3:56PM
    MilarkyMilarky Forumite
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    edited 17 July 2010 at 3:56PM
    The Government is proposing that amounts received by individuals under any of the above arrangements will be taxed at income tax rates. A single flat-rate recovery charge of around 55% is proposed to apply to unused lump sums remaining on death, designed to recover past tax relief. However, death benefits for those who die before age 75 without having accessed their pension savings will remain tax-free.
    Have I read this right (perhaps I've never understood pensions properly)? There appears to be a 'precipice' at age 75 when, if you have forgotten to take any of your pension 'benefits' either as a straight annuity or some version of drawdown and die unexpectedly the fund suddenly gets taxed on the same basis as if it were already in drawdown (i.e. at 55%). So that's 'tax free' to '45%' in a day.

    (Some one please tell this is wrong)
    .....under construction....
  • edited 17 July 2010 at 4:23PM
    hugheskevihugheskevi Forumite
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    edited 17 July 2010 at 4:23PM
    Have I read this right (perhaps I've never understood pensions properly)? There appears to be a 'precipice' at age 75 when, if you have forgotten to take any of your pension 'benefits' either as a straight annuity or some version of drawdown and die unexpectedly the fund suddenly gets taxed on the same basis as if it were already in drawdown (i.e. at 55%). So that's 'tax free' to '45%' in a day.

    (Some one please tell this is wrong)
    You have read it correctly.

    The charge is to ensure that there is not an incentive to use pensions for inheritance tax avoidance or as a vehicle to pass tax relief on to children. Otherwise, higher-rate taxpayers might just put a lot of money into a pension and 'forget' to ever draw it, thus passing on the tax relief to their children.

    At the moment, a higher-rate tax payer (but under £130,000) with access to salary sacrifice can get income tax relief of 40%, employer NICs relief of 12.8% and (from next year) employee NICs relief of 2%. That is 54.8% relief. So you could view the charge as the taxman taking back what he has put into a pension that doesn't seem to have been intended to be used to provide an income in retirement.

    This is actually an improvement on the current arrnagements for post-75 pensions.
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