August 2008

Rule of three

Dear Editor,

There has been much publicity recently surrounding calls for the abolition of "compulsory annuitisation". The majority of the views seem to be based on the premise that once someone reaches the age of 75 they have no choice but to purchase an annuity (preferably by utilising the OMO).

However, few people seem aware that there are in fact three options for individuals in DC schemes when they reach age 75; lifetime annuity, scheme pension or alternatively secured pension (ASP). Irrespective of the original government intentions for ASP or how these have been altered the fact still remains that ASP is currently available to anyone reaching age 75.

As these other retirement options exist does the term "compulsory" annuitisation correctly reflect the true position?

The government's "pensions deal" also needs to be taken into account in that the government offers the tax relief incentives for contributions going into pension provision and the tax free roll-up of the fund for the purpose of encouraging the provision of income in later life. It also needs to take into account the expectation that they will recoup some of that tax saving when the pension fund is taken as income. Some industry commentators have responded to this by proposing to introduce a minimum income level at age 75 in order to satisfy the potential tax loss to the exchequer. Whether a minimum income goes far enough in satisfying the pensions deal is a story for another day.

Are the calls for the abolition of the perceived "compulsory annuitisation" made only with the desire to replace it with something similar to ASP? Income drawdown post age 75 already exists via ASP. In addition, ASP allows individuals not wishing to purchase an annuity to continue to remain invested. The ASP income limits seem to mirror some suggestions for the replacement to "compulsory annuitisation" by ensuring that a minimum income is drawn (currently 55% of the GAD rates). With the ability for assets to roll over into ASP at age 75 the argument around investment encashment timing and the potential risks surrounding poor investment performance prior to age 75 become irrelevant.

With the current choice of three retirement options at 75 instead of "compulsory annuitisation" would a more appropriate description be "compulsory review" and, if so, would calls for the abolition of a "compulsory review" gain industry support? I suspect not. Instead of focusing on a problem which doesn't seem to exist shouldn't we instead be campaigning for government reassurance with regards to the continued availability of ASP?

Adam Wrench
Product Development Manager
London & Colonial