Old pension rules?

Dird

The government seems to like to tweak stuff all the time. A Guardian article seems to suggest that the only thing you could do with your pension until 2015 was take an annuity, is this true? You couldn't even draw down from your investment pot until last year?

https://www.theguardian.com/money/2014/oct/14/uk-pension-reforms-what-mean

TadleyBaggie

Not true. I had a drawdown pension setup in 2008.

PensionTech

For one thing, this article is two years old, so I'm not sure why it's being referred to now.

The Guardian article is pretty terrible but also pretty typical of newspaper publications at the time. Pensions became a hot topic, and journalists who couldn't tell their DB from their DC were suddenly being asked to provide technical commentary on a highly complex set of tax regulations developed over many decades. For instance:

Is it true you need a minimum income of £12,000 to take the money?
On Radio 4’s Today programme, Priti Patel, the exchequer secretary to the treasury, seemed befuddled by questions on this. This morning the Treasury press office was the same. A spokeswoman said she was unaware of any restriction of this type.

The Treasury press office is hardly going to have in-depth knowledge of all government policies. Even a brief conversation with any experienced pensions professional would have answered this very quickly - i.e. yes, until April 2015 people could take drawdown, but the amount they could draw down each year would be capped unless they had a guaranteed minimum income of £12k pa (formerly £20k pa - this was reduced to £12k with more or less immediate effect upon the Budget announcements in 2014, before being scrapped altogether in 2015) for life. If they had such an income it would generally derive from an annuity or DB pension. This restriction was lifted in April 2015 so that anyone could take uncapped drawdown whatever their income, hence the new freedoms.

This is far from the worst example of pensions reporting I've ever seen. The Express (I think) ran with an article saying that before the freedoms, people could only take up to £25,000 - rather than 25% - as a tax free lump sum. The Telegraph published a story as recently as 6 August suggesting that employers were deliberately bumping up transfer values to encourage members to transfer out against their best interests (whereas in fact the recent slump in gilt yields is responsible for higher transfer values, as a natural result of the way in which transfer values are calculated, and while employers might sometimes offer specially enhanced transfer values in the hopes that more members will transfer out, this is quite a rare and heavily regulated exercise, and employers have to pay for members to have access to regulated financial advice precisely so that they don't do anything against their best interests). Total rubbish.

In short, don't rely on newspapers for your pensions knowledge.

jamesd

Dird wrote: »

A Guardian article seems to suggest that the only thing you could do with your pension until 2015 was take an annuity, is this true? You couldn't even draw down from your investment pot until last year?

It's not true. In 2006 Alternatively Secured Pensions were introduced and that removed the requirement to buy an annuity at age 75. Drawdown had been possible for normal personal pensions from 2005 until age 75 and ASPs removed the last element of broad annuity compulsion. ASPs weren't really initially intended for the wider population. They arrived to cater for a particular religious sect, the Plymouth/Christian Brethren, who believe that buying an annuity is gambling on life because you benefit from the deaths of others. They prohibit that. But the rules did apply to all.

ASPs no longer exist as of 6 April 2011, having been made obsolete first by Capped Drawdown and now since 6 April 2015 by Flexible Drawdown.

The end of the requirement to buy an annuity has been announced many times since 2006 but some people still haven't received the message so we'll probably need to see it being announced again regularly for the next few decades.

It's still true that lots of people are "herded into buying an annuity", particularly if they have a pension pot with an annuity. That's in part because annuities can be profitable products and even third parties can make money by selling them.

Malthusian

What the Guardian article actually says is "Savers have always had the freedom to take 25% of their pension in a tax-free lump sum, but have then generally been herded into buying an annuity with all of the rest of the money". Bearing in mind the utter cluelessness of most financial journalists, this is far from the worst summary I have seen of the pre 2015 status quo ante. Prior to 2015 you were either forced or if not forced, strongly incentivised by the tax rules to buy an annuity after you reached age 75. "Herded into" is not the worst possible summary of this state of affairs, although the failure to mention that this herding was primarily at age 75 is a glaring lacuna.

Very briefly:

• Before 1995 you were forced to buy an annuity when you wanted to take benefits from your private pension fund.
• In 1995 income drawdown was introduced as a response to falling annuity rates (a recurring theme), but you were still forced to buy an annuity at 75.
• In 2006, you were no longer forced to buy an annuity at 75, however after 75 you were forced to draw a certain level of income if you remained in drawdown, and the tax charge on unspent funds on death became a penal 82%. (This meant it was usually better to buy an annuity with a 10 year minimum payment guarantee - for both you and your family - than to soldier on in drawdown.)
• In 2011 the minimum income withdrawal post 75 was removed but the 82% tax charge remained.
• In 2015 George Osborne confounded the whole industry including his Pensions Minister by pulling "pension freedoms" out of his Budget hat, ending any compulsion or disincentive not to continue in income drawdown for your lifetime, and for that matter beyond - going from a penal tax charge on unspent pension funds to making pensions potentially a very tax-efficient vehicle for passing funds down through the generations.

My Googling suggests that on every single one of these four occasions the Chancellor proclaimed they had "ended the requirement to buy an annuity" before Osborne actually did it.