Treasury’s announcement of draft legislation for the Finance Bill 2011, including a host of changes to pension taxation, has sparked a variety of reactions throughout the industry.

In particular, changing the rules around compulsory annuitisation and pension drawdown has elicited a wide array of responses.

Head of pensions market development at Scottish Widows Ian Naismith welcomed the relaxation in annuitisation rules. However, he said the pensions and investment company was ‘very disappointed’ that the measures are proposed to take effect from April 2011, before the enabling legislation will have been passed.

Scottish Widows argued that it would have been ‘much better’ if implementation had been delayed until 2012, to enable ‘an orderly transition’ to the new regime.

“Apart from the timescale, we are broadly happy with the proposals. We welcome the option of leaving funds on death to charities without tax consequences, which Scottish Widows proposed, but are disappointed that otherwise the tax on death remains at 55% which will penalise those who have not benefited from higher-rate tax relief on contributions. However, the removal of the penal taxes on death after age 75 is a positive move and will help many with their retirement planning. We also continue to believe that the operation of flexible drawdown will be very difficult to monitor, and expect a need for further anti-avoidance measures as well as those proposed in the draft legislation,” Naismith said.

The National Association of Pension Funds (NAPF) said the ‘extra flexibility’ from new rules around annuities could be useful, but the changes would mainly benefit those with larger pensions and multiple income streams.

NAPF chief executive Joanne Segars said that while annuity rates have fallen recently, annuities remain the best option in most cases.

"The real problem is that people are simply not saving enough into their pension pot in the first place. The Government should be doing more to encourage strong workplace pensions and creative, flexible ways of saving for retirement,” Segars said.

Head of pensions policy at Standard Life John Lawson said the changes are ‘great news’ for the Self Invested Personal Pensions (SIPP) market, which is widely used for income drawdown.

“People have shunned drawdown because the ASP [Alternatively Secured Pensions] rules imposed tight controls on income withdrawals and imposed a massive tax charge of up to 82%. Removing these restrictions and substantially reducing the tax charge will result in a big increase in the numbers of people opting for drawdown via SIPPs.

“The removal of the need to annuitise at any age should help encourage more people to save for the long term,” Lawson said.

Director of authorised funds and tax at the Investment Management Association Julie Patterson welcomed the Government’s commitment to remove the need to annuitise by 75.

“Although annuities will continue to have an important role to play, they should be chosen for the right reasons in the context of a market where wider options are available.

“In a time of fiscal constraint, the modest change to the stamp duty reserve tax (Schedule 19) is a step in the right direction and a positive change for collective investment schemes,” Patterson said.

Retirement planning expert at Skandia Adrian Walker said the new income drawdown rules, and the removal of age 75 restrictions, are good news for investors but there is an ‘immediate question’ over whether people currently in income drawdown will soon receive a lower income.

“If you are already in income drawdown and have your next 5 year income review date approaching soon after April next year there is some uncertainty.

“This is because we don’t yet know what maximum income rates will be applied under the new capped drawdown rules when income limits are reviewed on or after 6 April 2011. We know they will be based on equivalent annuity rates which are historically low and we know that the maximum has been reduced from 120% to 100% of the equivalent annuity rate so it is possible that maximum income levels will drop. People using income drawdown as part of their retirement income planning need to be aware of this and take advice urgently to ensure this does not have a detrimental impact on their lifestyle,” Walker said.

Head of operations at Alexander Forbes Annuity Bureau Gemma Goodman labelled the changes around annuitisation a ‘positive step’, though warned that the changes should be taken with caution.

“Giving the consumer more options of course is a good thing, however, could add further complexity to an already confusing time of life. There are benefits to locking into and deferring the purchase of an annuity, and it needs to be an individual decision.

“Annuity rates are still at a historical low, however, due to increased mortality rates they could still represent a good option as people have every chance of receiving an income for many years in their retirement,” Goodman said.

Allowing those with larger pension savings unlimited access to their capital would likely see some sustaining significant losses, and being left with insufficient funds to support their lifestyle in retirement, Goodman added.

“If anything it really does reinforce the importance of seeking good quality and thorough advice at the point of retirement, in order to best tailor individual options.

“Of course this isn’t an issue for many of the retiring population affecting only 2-3% of people.”

Head of employer solutions at Grant Thornton UK LLP Clive Fathers said the announcement looks positive ‘at first sight’, and those with larger pension pots and funds elsewhere will benefit from the changes.

“However, the vast majority of people have far smaller pension funds and unfortunately they may now be at a disadvantage as this new legislation will drive down the annuity yield they could benefit from. Annuity rates will decrease if the number of people opting out leads to the average life expectancy increasing for those that do purchase, which in turn will drive down the annuity rates.

"The draft Finance Bill 2011 also announced new legislation allowing individuals with a lifetime pension income of at least £20,000 per annum to gain access to their drawdown fund without restriction. This may see us move into an era where people think more broadly about investments for their future and make braver investment decisions perhaps by withdrawing money previously put in annuities to invest in options with a better return," Fathers said.

Wealth management consultant at Creative Benefit Solutions Craig Harrison said that the ability to access funds once a pension income of £20,000 per annum has been reached would be the ‘headline grabbing’ news for the layman, in reality the size of the pension fund required to provide income at that level.

“The other good news is the removal of the requirement to buy an annuity from age 75. However, the maximum income a person can draw down from their pensions will be reduced from 120% of the equivalent annuity rate to 100%. Those people who are simply drawing out as much of their fund as they possibly can will not be keen on this change, especially if they don’t have a secured pension income of £20,000,” Harrison said.

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