Pension reforms risk failure unless income rules are simplified, says Skandia
A swift change to retirement income rules is required in order for the government’s proposed pension reforms to work, according to Skandia, part of Old Mutual Wealth.
Skandia believes that references in The Finance Act 2004 to the many different ways of taking an income from a defined contribution pension scheme, including lifetime annuities, short-term annuities, capped drawdown, flexible drawdown and scheme pensions, should be scrapped and replaced with a simplified model in order to ensure the reforms deliver the simplicity and clarity for the consumer they promise.
The Chancellor’s Budget announcement in March raised the prospect that consumers will have more access to their pension savings than ever before, but they are still likely to be faced with a bewildering array of options as the rules currently stand.
Skandia says there only needs to be three options for withdrawing money from a defined contribution pension:
1) A tax free lump sum (for the first 25 per cent of a withdrawal), and
2) (for the remaining 75 per cent of a withdrawal) A taxable lump sum, or
3) Applying funds to a retirement income product
This model produces a number of solutions to meet consumers’ changing needs. A combination of tax free and taxable lump sums will meet the need for tax efficient income. A tax free lump sum and a retirement income vehicle (which could be drawdown, annuity or a hybrid of the two) will satisfy the need of those who need a large withdrawal to re-arrange their finances, for example to pay off an interest-only mortgage.
Adrian Walker (pictured), retirement planning manager at Skandia, says: “We believe that the overly complex rules governing annuity and drawdown products need to be abolished. All that is necessary are sensible rules regarding how money is extracted from a defined contribution pension scheme.
“Following the Budget announcement, consumers are expecting it to be easier to access their pension savings. If product rules remain their expectations will be frustrated by the restrictions on choice that will still exist. While people like to have a choice, they don’t like to choose so if we can simplify the options available to them, we are likely to see greater engagement with their retirement savings.”
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