Removing the requirement to annuitise by age 75: Sackers’ response
Due in part to increasing longevity and the fact that people are working for longer, the Government intends to remove the effective requirement to purchase an annuity by the age of 75 from April 2011. The consultation was published on 15 July 2010 and sets out the Government’s proposals for developing a new tax framework for retirement, namely by allowing:
- capped drawdown: a flexible drawdown model enabling individuals to choose how much to draw down annually from their pension pot throughout retirement (subject to a capped limit), or whether to draw any income at all; and
- flexible drawdown: allowing individuals to draw down unlimited amounts from their pension pot, provided they can demonstrate that they have secured sufficient minimum income (the minimum income requirement or MIR) to prevent them from exhausting their savings prematurely and falling back on the state.
We set out below our comments on a number of practical issues arising from the consultation. However, given that many of the questions posed by the consultation are actuarial in nature (such as the promised annual drawdown limit for capped drawdown or the MIR in the case of flexible drawdown), or aimed specifically at annuity providers and independent financial advisers, we have only addressed those issues which are relevant to our legal practice.
We support the proposed introduction of additional options for members on retirement. However, we consider that take-up of these options is likely to be limited to high earners, in particular given the MIR for flexible drawdown. High earners make up the most likely category of individuals who might wish to take advantage of the proposed drawdown options.
It is also likely that the drawdown facilities will be most frequently implemented via individual DC personal pension schemes, such as SIPPS, rather than occupational schemes.
We note the continued use of age 75 as a proxy for the end of an individual’s working life, (for example at paragraph 2.25 of the consultation). However, given continued, and projected future improvements to life expectancy, is this something that the Government intends to keep under review?
In this response:
- Availability of the drawdown options
- Minimum income requirement
- Transitional arrangements
- Flexible retirement
In our experience, the majority of schemes have yet to implement an income drawdown facility for members. It is unclear from the consultation whether schemes will be required to offer income drawdown after retirement if they do not already.
We anticipate that the imposition on DB schemes of a requirement to offer income drawdown is likely to be unpopular and onerous.
Although it would be possible, in theory, to apply the proposed new drawdown facilities in DB arrangements, in practice they would be very complicated to administer. If a DB scheme member took advantage of one of the drawdown options, there would be a concern as to who would become responsible for investment of the member’s remaining fund – in other words, schemes would not wish this responsibility to fall on the trustees. It would also create an additional layer of complexity in terms of scheme administration, particularly if a significant proportion of scheme members take up the option.
Therefore while increased member choice is to be welcomed, schemes which offer internal annuitisation (both DB and DC) should not be obliged to offer these options within the scheme. In any event, members would remain free to select an alternative option at retirement on the open market.
As noted above, the drawdown options will be most easily implemented in personal pension schemes.
One of the issues to be considered as part of the consultation process is the way in which the MIR should be assessed, (see paragraph 3.4 of the consultation). In our view this is something which could be difficult and potentially expensive for schemes to monitor. It should therefore remain the responsibility of the individual who has taken advantage of the flexible drawdown option (through their tax return, or similar reporting requirements).
Consideration also needs to be given to individuals who are currently using existing drawdown arrangements. We assume that members will be permitted to keep their existing arrangements or switch to the new style arrangements.
On a positive note, the introduction of these options, in addition to the Government’s present review of the default retirement age, may be the springboard for implementing a broader range of options for members approaching retirement.