Pensioners to be ‘trusted’ with their own pots

He said that people who have “worked hard and saved hard all their lives, and done the right thing” should be “trusted” with their own finances and that was prescisely what the government was going to do.

Changes from today

First, ahead of the main thrust of the mass simplification of limits and thresholds that is scheduled for 2015, the drawdown regime has been changed from today (27 March) to give greater access to pension savings.

The income requirement for flexible drawdown has been cut from £20,000 to £12,000 and the capped drawdown limit raised from 120 per cent to 150 per cent. In addition, the size of the lump sum small pot increased five-fold to £10,000 and the overall amount that can be taken as a lump sum boosted from £18,000 to £30,000.

Life companies had just a week to put all of the new provisions in place and some have fared better than others.

While several, including for example LV, have said they be ready to quote drawdown business subject to all of the new limits, others are only able to support some of the changes, with the increase to the capped drawdown income limit the most common stumbling block. Changes should be in place in a matter of weeks in most cases, however.

The Treasury has also confirmed that as part of the Budget overhaul of drawdown rules the government has waived the requirement for savers to “secure an income” within six months of taking their 25 per cent tax-free lump sum.

The change will mean retiring savers can take their lump sum now and wait until next year’s more extensive changes to retirement income rules before deciding what to do with the rest of their pot.

Changes from 2015... subject to consultation

All remaining tax restrictions on how pensioners have access to their pension pots will removed from April 2015 - subject to an industry consultation.

This caveat is important: while many are supportive of the changes, there is strong opposition in some quarters from those who believe it will lead to more spending their savings and falling back on the state.

Mr Osborne said: “No caps. No drawdown limits. Let me be clear. No one will have to buy an annuity.”

If implemented as proposed, this will mean retirees can take all of the money from their pension, in whatever increments they like including as a single cash lump sum at the outset, paying only a marginal rate of tax on the 75 per cent that cannot already be taken tax free.

This, according to many, will dramatically reduce the market for single annuities. Yesterday Nigel Wilson, Legal & General group chief executive, predicted the market would shrink from £11.9bn currently to just £2.8bn worth of premiums.

Such fears promoted shares in life companies to nosedive in the wake of the speech, shedding £3.2bn in just one hour with annuities specialists Partnership and Just Retirement worst hit.

Partnership has since labelled the sell-off an overreaction, while a number of providers including Partnership, L&G and Prudential have already begun to focus on bulk annuity deals for defined benefit schemes, which are currently unaffected by the proposals.

More pertinently for clients, most firms have extended cancellation and guarantee periods and a number have even paused or suspended recent annuity purchases to give people time to re-assess if their annuity purchase is the right choice.

Others have sought to refocus on their drawdown proposition, with Standard Life, Aviva and LV, among others, announcing the minimum pot size would be immediately reduced to £30,000 to offer flexibility to those that are not caught by the trivial commutation increase until the second phase of the reforms kicks in in 2015.

AE consequences

The latest strands of fallout from the changes to emerge has been a number of providers of auto-enrolment pensions confirming the changes will require them to review the strategy for the default funds, which they must offer as part of any qualifying scheme.

Currently six providers - including government-backed National Employment Savings Trust alongside Aegon, Aviva, Now: Pensions, The People’s Pension and Scottish Widows, revealed they are reviewing their funds.

Standard Life and Legal & General said they are not reviewing their strategies, with the former stating that it is not necessary as it has more than one default fund in place.

However, Darren Philp, head of policy at The People’s Pension, told FTAdviser: “I think everyone will have to review their default investment trusts.”

Morten Nilsson, chief executive of Now: Pensions, added that lifestyle funds assume that savers are on a journey that typically ends with an annuity purchase.

He said the Budget reforms mean that people will look at other ‘at retirement’ options and this must be reflected in the “design” of auto-enrolment pension strategies.

There will also be consequential implications for defined benefit pensions upon which Mr Osborne said the government “will consult and proceed cautiously.”