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meagre harvest I am pleased to note the Inland Revenue’s consultation on pension annuities has been delayed, I trust to allow time more constructive and radical thinking. With Paula Diggle in charge of pensions policy at the Revenue, it would be surprising and disappointing if the much hated Soviet-style obligation to buy an annuity by the age of 75 is not at last ended. The first, simple point the government needs to grasp is that this is not a rich man’s issue. Middle England, middle managers, women and small business people with money purchase pension schemes deeply resent the heavy hand of the government forcing them to hand over all their pension savings to buy a bad value annuity by 75. The second, fundamental issue, is that just as the Treasury and FSA, post N2, is gearing up in earnest its offensive against insurance companies, based on their fundamental objection to unnecessary costs for insurance “wrapping” of savings products, the Treasury and Inland Revenue have been defending the unnecessary insurance wrapper costs and poor performance of pension annuities for the retired. Does the Chancellor realise the conflict inherent in these two particular policies? Not surprisingly, the actuaries and pension consultants have been lobbying the Treasury to respond to the McDonald Report by permitting more flexible, equity-based annuity contracts. Equity Annuities London & Colonial is now offering a Gibraltar-based equity annuity (the “Open Annuity”) for British pensioners, which permits them to choose their investment strategy and instruments among UK unit trusts, investment trusts, OEICs and cash; and where on death of the annuitant, the balance of the assets in the deceased’s annuity fund can pass to their heirs, subject to inheritance tax. The drawbacks are a 1.5 per cent annual charge and a 3.75 per cent initial charge. I cannot believe this is the type of solution which the Treasury or Paula Diggle would want to advocate, when both have campaigned for lower charges and simple products. At its simplest, if this type of annuity can achieve what people want, why not let them organise it themselves, without incurring the unnecessary, insurance wrapper charges of an annuity? The Canadian case 14 years ago, Canada addressed the annuity issue successfully, by putting in a system similar to that recommended by the McDonald report, of allowing retirement accounts as an alternative to buying an annuity. All drawings from such retirement accounts are treated as income for tax purposes, and any balances left over on death suffer an income tax withdrawal charge and are taxed where relevant, as part of the deceased’s estate. Canada has not experienced the unlikely scares that the Treasury has argued might follow from taking this course. The arrangements did not lead to any material change in Canadian pension saving by individuals. The Treasury’s expressed concern that ending the obligation to buy an annuity at 75 would lead to a massive loss of tax revenue because people would save to the maximum under the UK pension tax rules, are inherently a straw man. Pension savings reflect what people can afford to save in cashflow terms. Although Ian McCartney may object in principle to the possibility of people passing on some of their pension savings to their children, in practice they already do so where they wish to, with the tax free lump sum. The point here, however, is that under the current rules, any such balances available for inheritance (under drawdown) are subject to a 35 per cent “income tax” charge as well as inheritance tax. Ending the obligation to buy an annuity by 75 would not suddenly make it tax attractive for everybody to save more in their pension schemes to pass on to their children; and where there are existing tax avoidance schemes in this territory, the Revenue is perfectly capable of addressing these specifically. Risks without returns I believe, however, that being able to pass on some of your pension savings to your children is not the main issue in the debate. The main problems are, firstly, that guaranteed annuities have become manifestly poor value and potentially high risk. To meet the income promised, the investment strategy for the providers of guaranteed annuities has to be long-term bonds, where real long-term interest rates are now artificially low – a result of the reduction in the supply of outstanding gilts at a time when demand from pension fund investment for gilts has risen. The buyers of non-indexed linked guaranteed annuities are also greatly at risk if, in the course of their retirement, inflation should rise. Equity-linked annuities are expensive and too complicated, where the annuity insurance “wrap” adds nothing of value. When Britain finally catches up with Canada and ends compulsion here, most people will continue to buy an annuity with their retirement pension savings, for security of income. It is right and proper that those who wish to manage their own pension savings in retirement should be able to do so – and, if they choose to be frugal, be able to hand on some of those savings to their children, subject to fair taxation. To avoid the risk of people “blowing” their pension savings and then, unfairly, relying on the state/other taxpayers, there should, in any case, be rules about the financial assets in which retirement accounts can invest – analogous to the rules for ISAs – and about how much people can draw from their pension savings each year in relation to their age. I
believe that concerns here are over-stated. In particular, women
with modest money purchase pension savings would mostly seek not
to draw on these, so as to have a reserve to finance nursing home
expenses in old age. In addition, large numbers of people have SERPS
pensions which, together with their state pensions, will provide
a pension income above the level qualifying for the MIG and other
welfare benefits. Not to free the majority from the tyranny of the
enforced purchase of an annuity, because of the refusal to address
this issue one way or the other, would be to succumb to the self
interest of the insurance industry. Howard Flight MP is the shadow
paymaster general, and joint chairman of Investec Asset Management
Ltd
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