RETIREES wanting to take advantage of the Government’s proposed annuity reforms could need a £300,000 pension pot to do so.
The proposals, now under consultation, would allow future pensioners to seek better investment returns if they are prepared to risk outliving their money, says Towers Watson. But the eventual significance of the proposal to allow pensioners to access more of their money early on in retirement will depend on the size of the lifetime income that they first need to secure, it adds.
HM Treasury announced last month that people with defined contribution pension savings will – from April 2011 – be able to keep their money in an income drawdown arrangement indefinitely, rather than being compelled to buy an annuity by the age of 75. Under the proposed reforms, pensioners would be allowed to withdraw more than a set annual limit, but would first need to secure a lifetime income or “Minimum Income Retirement (MIR)”, to prevent them falling back on State benefits later in life.
Towers Watson suggests that while the size of this MIR is subject to consultation it could end up being a big number relative to most pension savings if the Government takes a cautious approach to ensure pensioners aren’t entitled to taxpayer support, having spent their own money.
Paul Macro, senior consultant at Towers Watson, says: “If you want to access more of your pension savings as a lump sum, the $64,000 question is still how much do you need to spend on an annuity first – and the answer could be a lot higher than $64,000.
If the Government only wants people to remain free of the Pension Credit, those with strong entitlements to the contributory State Pension may have a lot more freedom over when they can get their hands on their additional savings. However, the Government’s concerns about ’double dipping’ appear to extend to Housing Benefit too. Since homeowners could always sell up and spend the proceeds, a big secured income may be required to cover this. The bar would be even higher if pensioners were told to ensure they did not turn to the State for help with long-term care as well.”
“If the Government took a conservative approach, many people would have to use roughly the first £300,000 of their savings to provide a secure income before being able to access the rest of their money upfront.
However, that number could fall if annuity rates improve, if means-tested benefits are pared back further in response to the fiscal crisis, or if the Government decides there is only a small risk of people running down all their non-pension assets.”
