The Hargreaves Lansdown head of pensions policy, who has been largely supportive of the freedom and choice policy, has accused the government of irresponsibility in actively promoting the new pension flexibilities to the 18m people with DB benefits, arguing Treasury pronouncements are stoking demand for transfers to riskier arrangements.
Today’s announcement from George Osborne at the Tory Party conference that the 55 per cent tax on pension assets on death is to be abolished has increased further the attractions of drawdown over annuities, which McPhail believes will discourage retirees from benefiting from the positive benefits of mortality cross-subsidy.
Broadstone has today expressed concern that the new approach to death benefits will create dilemmas for DB scheme members who may feel they have a duty to take a riskier pension, potentially at lower than market value, so they can leave a bequest to their heirs.
McPhail is also concerned at the way the Treasury is constantly emphasising the opportunity for private sector and funded public sector DB members to transfer to a riskier scheme. A government information website says ‘around 18 million people will ultimately be able to withdraw their pension flexibly should they wish to do so’.
McPhail says: “The whole direction of government policy is going against allowing retirees to benefit from mortality cross-subsidy, which is one of the most valuable and economically-sound factors that can influence their retirement outcomes. Mortality cross-subsidy is a highly efficient way of maximising your retirement income. The current direction of policy is significantly undermining the stability of the pension system.
“I feel uncomfortable at the way the Treasury has suggested 18m people in DB schemes will be able to benefit from the new freedoms. That is an irresponsible attitude.
“People will want to transfer out and schemes will collude with them on this. They will offer maybe 95 per cent of the value of benefits, and people will take them up on it. I think it is cynical on the part of the government to position this in this way.
“Dependants’ pensions being paid today from drawdown plans will become tax free. So far so good. By contrast, dependants’ pensions from annuities and scheme pensions such as final salary schemes, will continue to be subject to income tax at the beneficiary’s marginal rate. We went back and checked this. Twice.
“This is a game changer and puts income drawdown at a significant tax advantage over annuity and occupational pension, including final salary schemes. This could ignite high levels of demand for transfers from guaranteed final salary schemes to market-risk based money purchase drawdown plans. It also significantly undermines the appeal of annuities, which have now been put at a very significant tax disadvantage.
“However managing the withdrawal of income from a pension fund over the term of retirement is not simple. Annuities carry two important advantages – they provide a guarantee of income for the rest of an investor’s life, however long that may be; they also allow investors to benefit from the ‘mortality cross-subsidy’, by sharing out some of the value of the pensions of those who die young, they increase the payments to those who live longer. This is an extremely efficient system.
“Since the budget we have seen development work on hybrid retirement income products which use complex investment guarantees and hedging strategies. So far we have not seen anything which appears to deliver a better mix of guarantees and potential investment returns than simply splitting a retirement fund between an annuity for certainty and a drawdown for flexibility.
“An announcement on this issue was not expected until the Autumn statement in December. Therefore the timing and nature of the announcement may owe something to political expediency.”