Retirement income and assets: the implications of ending the effective requirement to annuitise by age 75
“For the vast majority of people, annuitising is likely to remain the safest and most appropriate option for converting defined contribution pension savings into a retirement income” says Pensions Policy Institute report
In 2010 the vast majority of people aged between 55 and 75 would not have had a large enough private pension pot to be able to bear the investment and longevity risks associated with Capped Drawdown and would not have been able to meet the Government’s Minimum Income Requirement of having a secure pension income of £20,000 per year, according to new research
published today by the Pensions Policy Institute (PPI).
The research is the fifth report in the PPI’s retirement income and assets series, looking at the future of retirement income and assets in the UK. The report explores the implications of the Government’s new legislation that ends the effective requirement to purchase an annuity by age 75.
Until June 2010, individuals with Defined Contribution (DC) pensions were effectively required to annuitise any remaining private pension savings (after taking an optional 25% tax-free lump sum) by age 75. As a response to calls for more flexibility, the Government has removed the effective requirement to use private pension savings to purchase an annuity by age 75.1 The Government’s stated policy objective is to make pension saving more attractive by giving individuals greater choice over how they provide a retirement income for themselves.
From April 2011, people will be allowed from the age of 55 to access their private pension savings through one, or a combination of the following methods:
· Purchasing an annuity at any point,
· Investing their pension savings in an income drawdown arrangement with no upper age limit and with a withdrawal cap of 100% of what they would have received from an equivalent annuity.
The Government is calling this approach ‘Capped Drawdown’.
· Withdrawing unlimited amounts from their pension savings, provided that they can demonstrate that they have a secure incomealready in payment, guaranteed for life of £20,000 per year in 2011.
The Government is calling this approach ‘Flexible Drawdown’.
This report explores how the new legislation could impact on the risks people face when accessing private pension savings and on individual financial outcomes in retirement.
Chapter one examines the income needs that individuals have in retirement and explores how different methods of accessing private pension savings could expose individuals to different types and levels of risk.
Chapter two explores current trends in how individuals with Defined Contribution pension savings access their private pension savings and what these might indicate about future behaviour.
Chapter three explores the potential impact of removing the requirement to annuitise by age 75, and the proportion of pensioners that might be able to use Capped or Flexible Drawdown.
Chapter four explores the potential impact on individuals who earned at low earnings during their working life.
Chapter five explores the potential impact on individuals who earned at median earnings during their working life.