Benefits of giving pensioners unfettered access to their pension fund including a Treasury tax windfall and greater reliance on private provision may not materialise on the scale expected due to the removal of the ‘death charge’ leading to more seeing their pension as an inheritance vehicle.
Speaking to FTAdviser, Duncan Robertson, marketing director at Aegon Ireland, explained the situation in Ireland when the Irish financial minister scrapped compulsory annuitisation in 1999.
Under those reforms, people could spend their retirement savings as they pleased or invest in an income drawdown-style product called an Approved Retirement Fund, he said.
Sales of Arfs have since outstripped those of annuities, but Mr Robertson said an unexpected consequence of the reforms was that people who had sufficient retirement income from other sources or could rely on the state were leaving the savings uncrystallised to pass on.
In 2006 the government changed the rules by levying a 5 per cent distribution tax on funds that are not drawn down on annual basis.
Mr Roberston said: “That’s interesting in the context of the UK with this removal of the ‘death’ tax, it’s not quite the same because you’ll still pay marginal tax, but I think the lesson is that sometimes you don’t get what you expect.
“Markets react and try to identify what is the best way of operating within the new environment; so I guess it’s just a note of caution. The main reason for pension saving should be to take an income in retirement, it’s important as an industry that we don’t leave sight of that.”
According to Treasury projections, the new pension freedoms will produce a windfall of £3.8bn in the years to 2019/2020. It could also rise from here, as new announcements have come since the figures were run.
Mr Robertson also cautioned on another unexpected result of the Irish changes: substantial launches and invest in “single-asset funds” or other alternatives to traditional pension investments which lacked diversification.
He explained: “You also started seeing people launching single asset funds, we saw property being the big fixation in Ireland.
“The risks of putting your pension fund into one asset is a lack of diversification; if something goes wrong there’s no going back. There will have been plenty of Irish people who were stung by the property crash, so that’s another lesson to be learned.”
Of course, since then product choices have moved on somewhat and the UK has many more providers innovating in time for next Spring.
Mr Robertson noted: “Before 1999 there was only annuities in Ireland, we’re now in a situation where as far as new business is concerned, around 75 per cent of the at-retirement market is drawdown and 25 per cent is in annuities.
“If you were to take that as a parallel, then the UK at-retirement market is about £15bn per annum, with annuities about £12bn of that last year, so you can see that dropping to around £3-4bn.
peter.walker@ft.com
