The UK Chancellor, George Osborne, stunned the pensions industry
when he announced the biggest changes to UK approved pension
schemes in almost a century In the UK Budget last month.
Channel Islands policymakers are now considering whether to
follow suit and allow people to take their pension as a lump sum
rather than annuity on retirement. Whatever happens, it seems
likely that the UK changes will have an impact on our ability to
purchase annuities and annuity rates.
UK registered pension schemes are tax advantaged vehicles that
encourage people to save for their retirement. Under the current UK
rules individuals reaching retirement age (which is any age from
age 55) must take their retirement savings in the form of an
annuity unless they qualify for what is known as 'flexible
drawdown'. Although an annuity provides a guaranteed income
until death, with interest rates extremely low and rising longevity
today's annuities offer relatively meagre incomes.
Retirees forced to turn their pension savings into an annuity
are often frustrated and angry that after a lifetime of saving,
their pension pots will not provide enough money to make for a
comfortable retirement. The requirement to turn pension savings
into an annuity has also served as a disincentive for would-be
savers, with many preferring to save in other tax efficient manners
(but which do not restrict the age at which access to such savings
can be obtained).
Prior to 27 March 2014, what is known as 'flexible'
drawdown was permitted in the UK on retirement if the retiree could
demonstrate a source of other income of at least £20,000. The
purpose of this restriction was to ensure that the retiree could
support themselves in old age without having to rely on the Welfare
State. As of 27 March 2014 this limit of £20,000 has been
reduced to £12,000 and from April 2015 this limit will be
abolished, so that on retirement everyone will have the freedom to
take all their savings in a defined contribution pension as a cash
lump sum, subject to their marginal rate of tax.
This means that people will no longer be forced to turn their
savings into a guaranteed income for life in the form of an annuity
but will be able to use their pension pots like a bank account,
dipping into it when they need to. This change has been seen by
many UK commentators and pension experts as extremely positive.
Of course the counter view might be that as pension arrangements
are tax-advantaged vehicles, and so effectively subsidised by the
State so that the State does not have the sole burden of funding an
individual's retirement, the State should have the right to say
how the pension pot is applied. Whether the State should have the
right to say how pension pots are applied comes down to whether as
a society we accept people will take responsibility for their
financial future in retirement and whether the alternatives to an
annuity will actually provide better longer-term benefits than an
annuity in the event that we begin to see stronger growth in
equities on the back of economic recovery.
Guernsey and Jersey registered pension schemes are also
tax-advantaged vehicles that encourage people to save for their
retirement. In both islands there is a requirement that the
majority of the pension savings are turned into an annuity on
retirement, by purchasing an annuity from an insurance company or
paid from the pension pot itself.
Whether the Channel Islands follow the UK's lead in removing
the requirement for retirees to turn pension savings into annuities
remains to be seen but with both Jersey and Guernsey pension
regimes currently under review it is something that our
islands' policymakers will no doubt be considering
We too need to encourage people to plan for their retirements
and if permitting flexibility to access savings encourages people
to save then maybe we should be empowering Channel Islanders to do
If we do retain the requirement to turn pension savings into
annuities we should seek to understand the impact the UK changes
are going to have on our ability to purchase annuities. We are
already faced with a shortage of annuity providers who are active
in the local Channel Islands market and this might be compounded by
the UK changes. Indeed, the shares in leading annuities providers
fell by more than 40 per cent following the Chancellor's Budget
speech. It is unclear what will happen in this market and what
impact it will have on annuity rates. We should also bear in mind
that if we retain the annuity requirement we will have less
flexible, and arguably less attractive, regimes than the UK and
this could impact on our pension industries on the international
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