Britain published new rules for private pensions yesterday which give retirees greater freedom to spend their savings as they like, fleshing out reforms announced earlier this year that shook the share value of British insurers.
Chancellor George Osborne caught Britain’s pensions industry by surprise in March when he scrapped a rule forcing people to buy an annuity, a financial product which converts a retiree’s pension pot into a guaranteed retirement income.
Osborne is keen to allow people to tap into the cash they set aside during their working life by reducing tax penalties imposed on those who withdraw their savings in a lump sum.
He wants that change to drive innovation in the £12 billion per year British annuity market.
To accompany the reforms, he also wants to make free independent financial guidance available. Yesterday, the government confirmed its intention to go ahead with such plans, seen as the biggest reform of pensions in a generation, and added details to its proposals following a consultation with industry, employers and consumer groups.
“It’s right to support hard working people that have taken the long-term decision to save for their future and I’m pleased that the responses we had to our proposals on making pensions more flexible have been overwhelmingly positive,” Osborne said.
The finance ministry estimated the changes could affect 18 million people, but said it expected the impact on financial markets would be modest.
“The government believes that the overall impact ... is likely to be limited,” it said.
“It is expected that there will still be a strong continuing demand for high-quality fixed-income assets, including government and corporate bonds.”
Osborne rejected the idea that the changes would allow pensioners to fritter away their savings early in their retirement and later suffer an impoverished old age. The reform plans have raised questions over how insurers will be affected by a dip in demand for annuities if there is no longer a requirement for retirees to buy them. When Osborne first announced the shake-up earlier this year, it hit the share value of firms like Legal and General, Aviva and Standard Life who run annuities businesses.
Those shares have since recovered slightly, but remain below their pre-announcement levels.
The price of long-term British government bonds, which are used by annuity providers to manage risk, fell after the initial announcement in March. But the finance ministry said that after consultation, the industry estimated that only 10-20 per cent of people in defined-benefit pension schemes would transfer out of them.
Some pension schemes might need to hold more liquid assets as a result, however.
Consultation response includes outlines for new annuity products which allow early lump-sum withdrawals and regular payments that vary over the lifetime of the product to meet the demand of retirement expenses such as care costs.
Annuities will also be allowed to provide a guaranteed payout, even if the recipient dies, for much longer than the current 10-year limit.
A summary of the consultation said the financial guidance provided to retirees would be provided independently and funded by a levy on regulated financial services firms.