Government dogma damaging pensions says Winterthur

Winterthur today accused the government of destroying any growing confidence among consumers in saving for retirement by allowing dogma to triumph over logic and consumer demand.

Following the Pre Budget Report in December 2006 HM Treasury issued a paper entitled 'The Annuities Market' which sets out the Government's policy on the 'decumulation' side of pensions. The Treasury quite clearly states what it calls the 'annuities deal' where in return for tax relief the Government requires individuals to turn their fund into a secure retirement income and uses this as the basis of their argument for not allowing pensions money to be passed on to future generations and the restrictions on alternatively secured pension (ASP). It is also indicated that this requirement dates back to the 1920s.

Mike Morrison, pensions strategy manager, Winterthur Life, says, "The pensions world has changed since the 1920s. We are living longer with often with changing circumstances, the irrevocable decision to buy an annuity may not be the best decision to make.
"The pension world has also changed in the fact that as individual pension funds can be very large – why should there not be an ability to pass money on to the pension schemes of future generations? Such money can be reasonably taxed and could also save future tax relief on contributions that the recipients did not need to pay.

"With its latest plans to restrict the benefit of ASP through increased tax charges the government is using a sledgehammer to crack a nut. The income requirements will produce a steady stream of income tax for the Exchequer and a flat rate tax charge of say 40% would replicate the effect of inheritance tax. The current proposals to make payments to non dependants unauthorised payments and therefore liable to a tax charge of up to 70% (with IHT possibly up to 82%) is disproportionate and blatantly against the spirit of pension simplification.

"Under the old regime pension investors were forced to buy an annuity with their pension fund at age 75. But falling rates (by 40% in the 10 years from July 1996 to July 2006) and changes to people's lifestyle and attitude to investment risk have made annuities unpopular among many investors.

"The introduction of ASP last April was perfect timing, which did much to enhance the attractiveness of the government's A-Day changes. The new rules meant investors now had a choice - in return for a lump sum an investor could receive an income for life; alternatively an investor could draw an income direct from the fund, with any surplus on death being passed onto heirs, albeit with a tax charge. The latter, owing to it carrying more investment risk through the gradual depletion of the fund, was always only going to be attractive for a limited market."

Morrison continues, "In The Treasury's own words, 'the annuities market has tripled in size since 1991, with nearly 300,000 new contracts in 2005 totaling £8 billion in premiums. Demand for annuities will increase further as more pensions savings are accumulated on a defined contribution basis and the new system of personal accounts generates an additional eight million new pension savers'.

"Should the saver with a substantial pension fund be subject to the same restrictions as one with a small personal account? Will there be insurers who always want to be in the annuity market? Will someone with a small personal account be forced to buy an annuity? Will annuity rates ever go up? – these are some of the questions we need to address.

"As ASPs were only introduced in April last year as part of the A-day changes to simplify pensions, many investors will view this u-turn highly negatively and unduly penal, and will not trust the government to retain any of the other rules that make pensions an attractive investment option."