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What are the implications of the UK Government's policy to remove the effective requirement to annuitise private pension funds by the age of 75?

Authors
  • Silcock, Daniela1
  • 1 Pensions Policy Institute, King's College, 26 Drury Lane, 3rd Floor, Room 311, London, WC2B 5RL, UK , London (United Kingdom)
Type
Published Article
Journal
Pensions: An International Journal
Publisher
Palgrave Macmillan UK
Publication Date
Nov 30, 2011
Volume
16
Issue
4
Pages
277–284
Identifiers
DOI: 10.1057/pm.2011.22
Source
Springer Nature
Keywords
License
Yellow

Abstract

The UK Government has removed the effective requirement to purchase a lifetime annuity with private Defined Contribution (DC) pension savings by the age of 75 years. People will still be able to purchase an annuity if they wish to but will no longer be required to purchase an annuity with their remaining private money-purchase pension fund by the age of 75 years. People with high levels of pension savings may be able to withdraw some or all of their private DC pension savings in unlimited amounts if they can demonstrate that they can meet the Government's Minimum Income Requirement (MIR) by having a secure pension income, in payment and guaranteed for life, of at least £20 000 per year (in 2011). In addition, individuals will be able to use income drawdown beyond the age of 75 years, to invest their funds and withdraw income from their private pension savings within certain limits set by the Government (Capped Drawdown.) The new rules will give private pension savers in the United Kingdom greater flexibility over how they convert their pension fund into a retirement income. However, the introduction of greater flexibility is accompanied by potential risks for individuals. In particular, individuals who invest their entire pension savings in capped drawdown and remain invested throughout their retirement run greater investment risk and longevity risk than those who use some or all of their pension savings to purchase an annuity. In 2010, the vast majority of people aged between 55 and 75 years 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 MIR. The Government will need to ensure that people have access to understandable, appropriate and accessible advice and information to ensure that they understand both the potential upsides, but also the inherent risks involved in accessing private DC pension savings more flexibly. This article is intended as a contribution to the policy debate about pensions and retirement provision. Individuals should not rely on it in making their own decisions about their own pension fund, as individual circumstances will vary.

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