Launching a market in second hand annuities
“We will be responding to the consultation and while we welcome the principal of freedom and choice, we question the value of this move as there are risks attached,” says Mark Rowlands, Principal at Mercer. “It’s proven that people place greater value on short-term reward now rather than looking to the long-term. We may see people prioritising short term issues, such as, paying off a loan rather than securing their financial future. People typically underestimate their life expectancy by around 5 years and some risk trading their long term financial security for an immediate one-off payment. No one knows how this market would function and what value the consumer will receive, it is hugely risky.”
Reducing the Lifetime Allowance
According to Nigel Roth, Senior Partner at Mercer,
“If the Lifetime Allowance (LTA) is reduced to £1 million, this will mean that, based on current rules, any member of a DB scheme with a built-up pension of £50,000 on retirement will be hit by the penalty tax charge. It’s not just the highly-paid who will be hit – this will apply to many public sector workers who have built up their pensions through longevity in the workforce.
We’re also concerned that the Government may change the terms on how DB schemes are valued for LTA purposes. If they change the DB valuation factor to, say 25:1 then with a revised LTA of £1 million, any person with a DB pension worth more than £40,000 at retirement will be hit with a penalty tax charge. This, along with restricting tax relief on pension contributions for higher-rate taxpayers, will mean that many people will look to other forms of savings, such as buy-to-let housing, instead of pensions.”
Personal Savings Allowances and new ISA proposals
“Reducing the Lifetime Allowance to £1 million is only expected to impact 4% of people reaching retirement in the near future but it will affect more and more people over time,” said Kevin Davey, Principal at Mercer. “This will force many individuals to review their overall long term savings plan, and the balance of how they save between cash, ISAs, and pensions to maximise their post-tax returns. The introduction of a new tax-free “Personal Savings Allowance“, and the new tax efficient “Help to Buy ISA” for first time buyers, are significant changes and should be considered carefully as part of their overall savings plan.”
Reducing the Lifetime Allowance – Impact on DC schemes
According to Brian Henderson, Partner at Mercer;
“The reduction in the annual Lifetime Allowance (LTA) to £1 million will hit DC savers harder than DB members. Under current rules, a DB pension of £50,000 will be impacted by the penalty tax charge. In contrast, an equivalent DC saver will only be able to receive a much smaller annuity before they are affected by the penalty tax charge. We estimate that a DC member will typically be able to buy a pension of under £25,000 a year based on current annuity rates.
“On the face of it, £1 million is a huge amount of money and beyond the reach of many. However, the impact of this reduction on DC savers reminds us that they continue to be the poorer relation when it comes to pension provision. To an extent, some DC savers will therefore welcome the Chancellor’s announcement of tax free savings on personal savings accounts of up to £1,000 a year and the increased ISA allowances as an alternative to pension savings.
There has recently been a call for an increase in the level of total contributions to a pension arrangement to 15% of salary. For a 25 year old saver currently on a £30,000 salary then, using standard illustrations this participant would accumulate pension savings of £1.1m over his working life, which is in excess of the LTA. This cannot be the Government’s objective.”
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