Abolishing age 75 Annuity Requirement unfair
by Dr. Ros Altmann
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Middle England subsidising fat cat pensions
Response to Age 75 Consultation
The Government’s recent annuity consultation has several failings. In my response, I have asked the Treasury to think again about the fairness of its proposals, which benefit the wealthiest enormously but at the potential expense of the middle classes. There is a risk that these proposals will worsen annuity rates, which are set to deteriorate further anyway. It is far more important to address the failings of the FSA regulation of annuity sales and improve the workings of the open market option (OMO). I am also calling for the Government to issue longevity gilts. Here is a summary of my response to the proposals
- Middle England subsidising fat cat pensions! 55% tax relief recovery rate unfair and penal for those who received basic rate relief. For the wealthiest pension savers, tax rates will fall from 82% to 55% or even 20%, subsidised by the middle classes. Those who die in drawdown before age 75 face a tax increase from 35% to 55% to finance this tax cut for the wealthy.
- OMO still failing majority of pension savers – FSA must intervene to change regulation of annuity sales. This massive regulatory failure risks Government being sued in future. Nobody should be allowed to sell annuities unless the customer has had help or advice to consider vital issues. The current default single life, level annuity should be banned, as this could worsen female pensioner poverty and lack of inflation protection in future. I first called for change in 2002, but the problem remains.
- Tax relief recovery should be levied on pension fund withdrawals or inheritance, even if no income has yet been taken, but at lower than 55%
- To ensure they do not ‘fall back on the state’ people will need to annuitise around £300,000 – £500,000 worth of pension savings, therefore flexible drawdown will only help top 1.5%! What about the rest of us?
- Proposals could cause annuity rates to worsen if people secure their MIR earlier than age 75
- Proper reform of state pensions would obviate the need for concern about annuitisation
Ros Altmann’s Alternative Proposals:
- Tax relief recovery charge of 55% is too high – should be reduced at least or those who received only basic rate tax relief
- Tax relief recovery charge should be levied on pension fund capital on either death or withdrawal, also on funds moved abroad, irrespective of income withdrawal
- Retirees should not be offered a default annuity – annuity sales process must be urgently reformed to ensure OMO works in customer’s interest not provider’s
- People should not be required to annuitise to secure the MIR – allow a capital sum to be lodged in an account instead
- Government should issue longevity gilts to alleviate worsening annuity rates
- Pension tax regime should incentivise long-term care funding
The cost of pensions tax relief is around £37billion a year. Such huge sums represent an enormous benefit for top rate taxpayers in particular and the current tax regime already helps the wealthiest pension savers far more than ordinary workers. The Government’s proposals on age 75 annuity changes will improve the tax regime even further for the very wealthiest, but at the expense of those lower down the income or wealth scale. The proposals will not help those who need most assistance in their retirement financing and far more is required to address the inadequacies of the annuitisation process for most of the nearly half a million people who buy an annuity every year.
The Government states that it wants to reinvigorate pension saving and that the current pension rules are unnecessarily restrictive. Unfortunately, although the aim of reviving a savings culture and reducing restrictions is sound, the proposed measures will only address problems faced by the tiny wealthiest minority of pension savers, while potentially worsening the position of many others.
The Government says the current rules are unnecessarily restrictive, but this is really only the case for the very wealthiest few percent of pension savers. For most people, the problem is very different – it is one of inadequate and ineffective regulation of the annuity sales process – and the proposals will not help the majority of pension savers. Indeed, for many, the proposals will result in worse outcomes, as they will increase the tax rates on those who cannot afford to leave their pension funds untouched until age 75 and die in drawdown, as well as risking worsening annuity rates if more people try to annuitise to secure their MIR at younger ages.
The pensions crisis and annuitisation problems affect the middle or lower earners most, not the wealthiest and it is these people for whom policy should be ensuring pensions work better. The current proposals do not address the most significant failures of the existing system.
These proposals will not do anything to help people in the new NEST scheme or those auto-enrolled into pensions
Middle classes subsidising pensions for the wealthiest. The Government’s proposals are grossly unfair. A 55% tax relief recovery charge is penal for those who only received basic rate tax relief on their pension savings. It is only ‘appropriate’ for higher rate taxpayers, but these are the minority of citizens. Top rate tax relief gives £2 for every £3 people invest in a pension, which is a 66% benefit. However, those on basic rate relief get only 20p for every 80p they invest, a 25% uplift. Thus a 55% recovery charge is unfair.
55% tax relief recovery charge is great for the wealthiest: Removing ASPs (Alternatively Secured Pensions) will simplify retirement options and tax treatment, but it will penalise all non higher rate taxpayers in the process. ASP tax rates will fall from 82% to 55% (or even to 20% if taxed as income on withdrawal for some people), which benefits all those who can afford to wait till after age 75 before annuitising or drawing an income from their pension savings. However, the current 35% tax on drawdown funds passed on by those who die before age 75 will increase to 55% – a large rise: The 55% rate will increase death taxes on many middle class pensions of those who die before age 75, in order to fund tax reductions for the very largest pension fund holders who will be the wealthiest pension savers. This is a transfer of wealth and tax benefits from the upper middle to the very top of the income distribution.
Current pension taxation policy is illogical – pension fund recovery charge should be levied on all withdrawals, but at less than 55%: The Consultation Document stresses that tax policy is supposed to ensure pension savings are used to provide an income in retirement and that the tax relief is recovered later – also that pensions should not be a means of passing on wealth tax free. However, the current tax regime on death for those who have not yet started drawing an income neither provides income nor recovers the tax relief, which goes against the stated principles and rationale of the pension tax relief regime. In fact, as long as an income has NOT been taken from the pension fund, it is passed on tax free on death. This means that those who are wealthiest and can afford not to take any income from their pension, can pass on their accumulated pension savings tax free if they die before age75, while those who need to take some income will suffer a tax increase from 35% to 55%. If the aim of tax relief is to ensure people have an income in retirement, then surely the tax relief recovery should be made from those who have not actually taken any income. Now would be an ideal opportunity to reform pension taxation fairly, rather than merely improving the position of the top echelons of society at the expense, potentially, of those lower down.
Wealthiest pension savers can already escape paying tax on their pensions, with QROPS (Qualifying Recognised Overseas Pension Schemes). QROPS are another example of the current tax regime’s favourable treatment for the wealthiest. Those who can afford to leave the UK are able to take their pensions without any tax relief recovery charge and will not even pay UK tax on the income they receive. They have received generous amounts of tax relief, which will never be recovered. Current QROPS rules allow the very wealthiest often to avoid UK tax altogether. In order to enhance fairness and help improve tax revenues. The tax relief recovery charge should be levied on funds moved abroad that would otherwise not repay any of the tax relief received.
Treasury still failing to address problems of OMO – I first called for a radical overhaul of annuity selling in 2002 – it has still not happened: Since the previous Government’s ‘Modernising Annuities’ consultation in 2002, I have been trying to help the FSA understand that the current OMO process needs radical reform. It is deeply disappointing that, eight years later, there is still a massive failure of regulation when it comes to the annuity sales process. Given the numbers annuitising each year (approaching half a million people) and the ongoing switch from defined benefit to defined contribution pension provision, coupled with the demographic profile which sees a sudden surge in the numbers of 65 year olds over the coming decade, the need for improved pension outcomes is urgent. There is a difference between allowing flexibility and choice and ensuring this. The current system may allow it, but in practice it works against those who have no adviser obtaining the best value for themselves from the irreversible annuity process. Advice before purchase is essential.
Retirees should not be offered a default annuity. The current annuity sales process is not working in the interests of consumers, it is in the interests overwhelmingly of providers. People who buy annuities do not understand the issues involved, often receive no help or advice with their annuitisation decision, feel forced into buying the annuity and, once bought, it can never be changed. The FSA fails to understand that annuities are a high risk product for many people. The Regulator seems to consider annuities are ‘no risk’ which is entirely wrong. Yes, people secure a lifelong income, but it may be the wrong level or the wrong type of income. By allowing the default offer from providers to be a single life, level annuity with only a 5-year guarantee, individuals are often annuitising without covering their spouse, which could aggravate the problem of female pensioner poverty in future. In addition, they will have no inflation protection and they may be entitled to an enhanced rate but not receive it. They may also obtain a very poor rate for their annuity from their existing pension provider, but once bought, they cannot change their annuity. They are stuck with it for life. No other financial product is so poorly regulated. By banning default annuities, and forbidding sale of annuities unless customers have considered the appropriate questions, people will have to make a choice that suits their circumstances and engage with the process, to consider the vital questions they need to answer before committing to a lifelong annuity.
Only the top 1.5% of pension savers will benefit from flexible drawdown. To ensure they do not ‘fall back on the state’ people will need a total income of around £15,000 a year. A married couple would need around £500,000 at age 60 and perhaps £300,000 at age 70 to be able to buy an index-linked joint life annuity to secure this level of MIR. The Consultation Document itself suggests only 8,000 people a year will benefit. Clearly, then, the current proposals only help the top echelons of pension savers.
There is a serious risk that these proposals will cause annuity rates to worsen: The current proposals could cause a worsening of annuity rates. If people annuitise part of their pension savings earlier than age 75, this could add demand that would otherwise have been delayed for some years into the future. Although the reforms should mean fewer people over 75 buying annuities with their whole pension fund, it could mean more people under age 75 will buy annuities up to the ‘Minimum Income Requirement’ (MIR), increasing demand for annuities in the nearer term for annuities worth around £300,000 – £500,000 from people in their 50’s or 60’s with large pension funds.
People should not be required to annuitise to secure the MIR – allow a capital sum. It would make sense to permit a capital sum to be set aside, rather than forcing annuitisation, with the amount of capital required being determined by index-linked annuity rates.
Government should issue longevity gilts – must take the volume issues seriously. There is a serious risk of annuity rates continuing to worsen. As more employers switch from defined benefit to defined contribution and as a result of Solvency II legislation, as well as the increasing trend of closed defined benefit schemes to buy-out or buy-in with annuities, the pressure on the annuity markets will increase. Issuing longevity gilts will help relieve some of the pricing pressure in the market.
Pension tax regime should incentivise long-term care. Pension funds should be convertible into long-term care fundding or insurance options, with tax incentives. This could help avert the looming care crisis, which will inevitably follow our pensions crisis as the ageing population reaches older ages.
Proper reform of state pensions would obviate the need for concern about annuitisation: Finally, if state pensions were properly and radically reformed, to provide a decent basic minimum social welfare payment, without additional mass means-testing, the Government would not need to be so concerned about people falling back on the state and pension savings could be freed to be used more flexibly as individuals wanted or needed.
Ros Altmann – +44 (0) 7799 404747