This year’s Budget did not contain any real surprises for pensions. The two key announcements are that:
- from April 2016, the Government will change the tax rules to allow people who are already receiving income from an annuity to sell that income to a third party, subject to agreement from their annuity provider (see below), and
- the lifetime allowance will be cut to £1 million from April 2016 and then increased annually by reference to CPI from 6 April 2018. Transitional protection will be introduced for pension rights already in excess of £1 million.
Other announcements related to savings and pensions include:
- further increases in the personal allowance to £10,800 in 2016-17 and £11,000 in 2017-18
- a new Personal Savings Allowance from April 2016 which will make the first £1,000 of savings income tax free for basic rate taxpayers, and the first £500 for higher rate taxpayers
- increased flexibility for ISAs so that savers can withdraw and replace money in the same tax year without losing the tax advantage (this change will be introduced in autumn 2015, following consultation with ISA providers), and
- the introduction of a new Help to Buy ISA scheme to support those saving to buy their first home under which the Government will provide a £50 bonus for every £200 that a first time buyer saves, up to a maximum bonus of £3,000 on £12,000 of savings.
Secondary annuity market
Following the Chancellor’s announcement that the Government plans to facilitate the creation of a secondary market for annuities from April 2016, HM Treasury and the Department for Work and Pensions have published a consultation paper on how best to achieve this and how to ensure that consumers are in a position to make an informed decision.
The development of a secondary market for annuities will allow policyholders to assign to a third party the right to their annuity payments in return for a lump sum, or to purchase a flexi-access drawdown fund or a flexible annuity, subject to the agreement of the annuity provider. The third party would, in return for providing this lump sum or funds to purchase an alternative product, receive what would have been the customer’s annuity income for the lifetime of the annuity holder. Individuals will be able to take the proceeds of the sale and save or spend them as they see fit, taxed only at their marginal rate.
Not only will this provide flexibility for existing annuitants, it will also create a new opportunity for pension funds, insurers, assets managers and other investors who are interested in acquiring longevity linked income streams from annuities.
However, there are a number of key questions that still need to be answered, including:
- Will annuity providers agree to annuities being assigned?
- Will individuals get good value when they sell their annuities?
- How will providers keep track of when the original annuitant dies?
- Should the annuity provider be allowed to buy back the annuity?
- What measures need to be put in place to help consumers make informed decisions?
Given the radical changes for pensions announced in last year’s Budget, trustees, employers and pension providers will be relieved that there are no real surprises contained in yesterday’s announcements. The creation of a secondary annuity market is a significant development. Annuity providers need to assess the practical impact on their business and pension providers, pension funds and asset managers will be keen to explore this new investment opportunity.