ANALYSIS
NEWS
04
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THE INVESTOR
This reformwill allowmore people
greater choice and the opportunity
of amore flexible income stream
PENSIONS
REFORMS TO ANNUITIES IN 2017
The pensions regime has undergone a revolution in the past
two years, with changes affecting virtually every area, from
the way in which benefits can be accessed on retirement to
the tax treatment of the fund on death. Now the government
has announced a reform of one of the few remaining areas
not to have been restructured: annuities which are already
in payment.
FromApril 2017, anyone drawing an income from an
annuity will be allowed to cash it in and take a lump sum or
put the funds into a drawdown arrangement to provide a
regular income. Currently, anyone cashing in an annuity pays
tax at 55% (70% in some cases); but, under the new rules, tax
will be levied at the individual’s marginal rate.
The government hopes to encourage the creation of a
secondary market in annuities, allowing third parties such as
insurance companies, asset managers or financial
intermediaries to be assigned the rights to the annuity. The
company providing the annuity income will also be allowed to
buy it back.
Some commentators, including the Association of British
Insurers, had expressed concern about the risk of fraud and
scams. They called on the government to ensure adequate
safeguards so that the rights of dependants and beneficiaries
were properly protected – particularly, it said, as many of those
holding annuities will be older people who ‘may be vulnerable
due to illness or reduced mental capacity’.
The government has promised ‘robust safeguards’ and the
Treasury has proposed introducing ‘a comprehensive consumer
protection framework’, one that includes the extension of its
free PensionWise advisory service to cover the secondary
annuity market; it has further proposed that anyone cashing in
annuities above a certain – as yet undisclosed – level will be
required to take advice. The Financial Conduct Authority is also
conducting its own analysis of the proposals to ensure that
consumers will be adequately protected. This protection could
include risk warnings for consumers and rules on the information
provided to ensure that consumers understand the fair value of
their annuities. Annuities held in joint names and those with
guaranteed rates will be excluded, and the new freedoms will
apply only to products held in the name of an individual. The
reforms will also cover annuities purchased in future.
Pensions Minister Baroness Altmann said: ‘Keeping an
annuity will still be the right decision for the majority of people.
But some were forced to buy annuities in the past that may
not have been suitable for them: this reform will allow more
people greater choice and the opportunity of a more flexible
income stream.’
Anyone thinking about cashing in their annuity
when the freedoms take effect should consult their
St. James’s Place Partner.
