“The Budget does not change people’s retirement needs, it just gives them more choice over how to satisfy them. Of those who choose not to buy annuities, many may enjoy better outcomes, but some will burn through their money too quickly and others will be too cautious about how much of their savings they allow themselves to withdraw and spend. DC pensions won’t always be pensions any more – they won’t have to provide a regular income throughout retirement.
To the extent that people access more of their pension pot earlier in retirement, this will also mean paying tax sooner – that’s why the government assumes the policy will raise £1.2 billion in 2018/19. The flip side is that it will collect less tax from pensioners later in their retirement.
The government says it will block transfers out of public sector DB schemes into DC schemes because it would rather pay a small income to its former employees each year than a big one-off sum at retirement. It is thinking about going further and erecting a Berlin Wall between private sector DB and DC schemes in order to avoid suppressing demand for gilts. DB members may therefore have a short window to act if they do want more flexibility over the shape of their retirement income. If the government relents on this and gives DB members the same freedoms as DC savers, there will be big implications for what DB schemes must anticipate paying out and when.
For DC schemes, it will be investment reviews all round. Where savers do not make investment decisions themselves, the strategy is usually to protect them against swings in annuity prices as they approach retirement. If schemes no longer expect people to be buying annuities, it could be back to the drawing board.
Eventually, these changes might put the whole pensions tax regime under the spotlight. There are big practical difficulties with changing it, but the Treasury might not be content with a system where people in their late 50s and early 60s can get a quick tax gain without having to lock their money away.
The impact on the UK life insurance industry and related sectors also needs to be considered. The immediate reaction in the market has been to mark down the values of several insurance companies quite significantly, and it does seem clear that the future flow of new annuity business may well reduce. But there are other areas where the insurance companies may benefit, for instance as providers in the pension accumulation (including auto-enrolment) space as well as managing drawdown propositions (with or without guarantees) where the new tax regime could make such propositions attractive. To an extent, this will still depend on the tax rate to apply to accumulated DC funds that remain in the pension wrapper at death, and this is an area where the government is still seeking responses to its consultation. In addition, the government is clearly looking to the financial services sector to help provide solutions in the social care funding area, which is likely to draw heavily on the core skillsets (including risk identification and pricing) within the UK insurance sector.”
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