From 6 April 2015, a radical change to the tax treatment of pensions has made significant funds potentially available for a broad range of investments. In response, a wide range of investment products, funds and opportunities are being offered to those reaching retirement age.
Changes to the taxation of defined contribution pensions were announced in the 2014 Budget, and took effect from the 2015/16 financial year. In effect, they allowed (and possibly encouraged) retirees, rather than using their pension fund to purchase an annuity and secure an income for life, to draw the funds in a whole or in part to spend or invest outside the pensions environment without tax penalties other than normal charges at their marginal rate.
The size of the pension fund held by an individual is usually significant in comparison with other assets that they hold. Opinion is divided about the extent to which these new “freedoms” will be used but there is no doubt that these changes will significantly increase the level of personal investment outside the pensions environment.
In the 2015 Budget, George Osborne announced proposals to extend these provisions to those who have already purchased annuities from 2016 by the introduction of a secondary annuity market. Effectively, this allows a pensioner (with the annuity provider’s consent) to “cash in” their annuity by selling to a third party and investing the funds elsewhere.
The impetus behind these changes is a perception by many that annuity rates represent poor value for money. Those releasing their pension funds to invest will be looking for longer term investments that provide an improved return.
A number of new investment products are being offered to this market, not least a “pensioner bond” available to the over 65s issued by the Government. A growing number of investment products are being developed for this sector and it is likely that the broader financial sector will be considering how to attract these significant funds for investment.
There is no reason why the private equity sector could not benefit from this development. Pensioner investors are generally willing to invest for a medium to long term period and the good returns without excessive risk offered by private equity funds may be attractive to many. It may well be that the coming months and years see an influx of direct or managed investment into private equity funds by this new group of investor. In any event, the new pension “freedoms” will change the investment market significantly over the next few years