PensionsDec 18 2014

Government warned about abandoning annuities

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The Government has been warned against completely abandoning annuities, with peers highlighting the number of countries “rowing in the opposite direction”.

Both the Pension Schemes Bill and the Taxation of Pensions Bill have been passed at their second reading in the House of Lords.

During the debate a number of peers raised concerns that countries like Australia and the USA were moving in the direction of annuities.

In Australia the Murray Review found a quarter of people with a pension pot at age 55 had depleted it by the age of 70.

It has recommended introducing compulsory deferred annuities that would pay out after the age of 85.

Meanwhile the US Treasury has said that it will offer a tax break for savers who buy annuities and allow pension schemes to offer long-term deferred annuities as a default.

Labour peer Baroness Drake said: “Both those nations are rowing in the opposite direction of the bills.

“The Office for Budget Responsibility states that the tax consequences of the reforms are ‘highly uncertain’ because no one knows how many people will spend substantial parts of their pot from next April.”

Fellow Labour peer Lord Hutton of Furness said: “The Chancellor of the Exchequer prayed in aid the Australian experience as providing the intellectual underpinning for his announcement on annuities reform. I am afraid to say that I am not entirely sure that he is on absolutely firm ground.

“There is a real warning sign here for us. That is why I strongly favour a hybrid approach - dare I say it, a third way - with greater freedoms to draw down pension savings on retirement, combined with a focus on the need to secure retirement income in later years.”

Since the Taxation of Pensions Bill is a money bill - dealing with issues surrounding the management of tax and public money - the House of Lords has no power to amend it so it will now be given Royal Assent and passed into law.

Meanwhile the Pension Schemes Bill will now be considered by a committee of peers.

Lib Dem peer Lord Newby, who represented the Government in the debate, said: “We have always been clear that an annuity will remain the right choice for many at some point in their retirement because it can provide the security that they are looking for.

“My personal view is that, particularly as people are working to a later age rather than retiring earlier, the number of people who will wish or think it sensible to take their pension at 55 will not be very great.”