We are sceptical about the feasibility of a secondary market in annuities. A really thoughtful review is necessary to see if the idea is truly viable without significant customer detriment.
A £1 million lifetime allowance seems to be getting very close to the size of fund that many investors could expect to achieve in their working life taking compound growth into account, especially those with long service in a defined benefit scheme. Given the annual allowance limit on contributions, we question the need for a lifetime allowance limit at all.
Although the measures affecting private pension scheme provision weren’t nearly as profound as last year’s Budget, there are still a number of important changes.
Here's our summary of them with links to Treasury or HM Revenue and Customs documents if you would like more detail.
As expected, the personal allowance will increase to £10,600 from 6 April 2015. The point at which higher rate tax is paid will increase to £42,385, ensuring that higher rate taxpayers also benefit from the rise in the allowance.
The personal allowance will increase to £10,800 from 6 April 2016 and to £11,000 from 6 April 2017 with the increases in the point at which higher rate tax is paid rising to £42,700 and £43,300 respectively.
1.229 – 1.232 and 2.81 of HM Treasury Budget 2015
and HM Treasury & DWP - Creating a secondary annuity market
As widely trailed, the Government confirmed that it would launch a consultation on how a market for buying and selling annuities can be established.
The aim is to have such a market up and running by April 2016, allowing pensioners to sell the income from their annuities for a cash sum. The cash sum will be liable for tax at the pensioner’s marginal rate, so they will have to be aware that the exchange could result in them being taxed at a higher rate than if they had stayed with an annuity.
Alternatively, the pensioner will be allowed to swap their annuity for a flexi-access drawdown plan from which they can withdraw money without limit or a flexible annuity.
Selling an annuity whether for a lump sum, flexi-access drawdown plan or flexible annuity will trigger the Money Purchase Annual Allowance of £10,000.
The income from the annuity would be assigned to the buyer who will have to be a third party - pensioners won’t be able to sell their annuities back to the original provider. However, the organisations that are prepared to pay for an annuity to be switched to them will only do so at a price that is commercially attractive to them and will only pay for annuities where the pensioner has a reasonable life expectancy. Add in the fact that there will be administration and advice charges to pay and you can see why the Budget document states that ‘The Government believes that for most people, continuing to hold their annuity will be the right decision.’.
It will not be possible to sell annuities bought by the trustees of an occupational pension scheme which are held as an asset of the scheme. Only annuities held outside the occupational pension scheme are within the scope of the new freedoms.
2.86 of HM Treasury Budget 2015
A late runner in the pre-Budget rumour stakes also turned out to be true. That was a reduction in the lifetime allowance from £1.25million to £1 million. However this won’t take effect until 6 April 2016. The lifetime allowance will be indexed in line with CPI from 6 April 2018.
Transitional protection will be available, presumably along the same lines as the protections which applied when the previous reduction from £1.5 million to £1.25 million was introduced from 6 April 2014. If that is the case, we will then have Fixed Protection 2016 and Individual Protection 2016 to add to the plethora of protections.
2.82 of HM Treasury Budget 2015
As already announced, beneficiaries of individuals who die before age 75 with a joint life or guaranteed term annuity will be able to receive the annuity payments tax-free so long as the first payment is after 6 April 2015. Joint life annuities will be able to be paid to any beneficiary, not just dependants.
The Pension Schemes Act 2015 requires someone who is transferring from a defined benefit to a defined contribution pension scheme to get appropriate independent advice if the value of their pension is £30,000 or more.
Employers who sponsor a pension scheme transfer exercise will be required to provide employees or former employees with appropriate independent advice. The cost of this advice will not be a benefit in kind to the employee and so will not attract an additional tax charge or national insurance contribution liability.
Published 18 March 2015
The information provided is based on our current understanding of the Budget 2015 and associated documents and may be subject to alteration as a result of changes in legislation or practice.