• Shares plunge as sector is forecast to contract hugely
The dramatic liberalisation of Britain's pension system unveiled in
the budget is likely to pump up house prices, spark a bonanza for estate
agents, car dealers and cruise ship operators – and could deal a
devastating blow for the UK's £14bn annuity business.
George Osborne's budget on Wednesday – in which he declared that "no one will have to buy an annuity" – swept away most of the regulations on pensions, freeing savers to do what they like with their retirement savings, starting from April next year.
And on Thursday pensions minister Steve Webb said it would be "their choice" if retirees spend their pension pots – which average £30,000 – and end up relying on the state pension.
Judging by the experience of Australia, a huge number of the 400,000 who retire with a pension pot in Britain every year will indeed choose to blow their savings on holidays and cars. And those with bigger-than-average pots will purchase property – particularly buy-to-let – which could further inflate house prices.
But some experts also predicted that pensioners might be too scared to spend, and instead leave their cash in low-interest accounts providing a meagre income even worse than current annuity rates.
Australia introduced compulsory workplace saving (called 'superannuation') long before Britain introduced auto-enrolment, but it does not require people to buy an annuity on retirement.
Research by Australian investment management firm Challenger found that one-third of savers used their pension cash to buy a home, pay off an outstanding mortgage or make home improvements such as new kitchens or conservatories. One in five splashed out on a new car, and one in seven spent at least some of their pension on a holiday.
The evidence from down under makes grim reading for Britain's annuity providers; when given the choice, only one in 25 Australians now buys an annuity – where an insurance company provides an annual income in return for receiving the pension pot.
In the US, another country where annuities are not mandatory, most people take their pension money as cash rather than buy an annuity.
Marc Hommel, global pensions leader at accountants PWC, said: "Where people have a choice, about 70% choose to take the cash. I'm personally not overly worried about it; you can see insurers lobbying against it, but in practice, people are going to learn to be more responsible with how their handle their retirement money."
He added: "When Ford introduced mass production of cars, people worried then about whether you could trust millions of people to drive cars."
James Lloyd, director of the Strategic Society Centre thinktank described the reforms as "a policy catastrophe" that will see some people "spend and splurge" while many others will leave the cash in low-paying savings accounts.
"The evidence suggests they will sit on their savings with a depressed retirement income, or run out of money altogether. It will also lead to pretty miserable circumstances for millions of people. It replaces the security and peace of mind of an annuity with insecurity and fear."
Others, Lloyd said, will be tempted to purchase a buy-to-let property for the income it will provide.
He added: "Treasury advisers may have not anticipated that they are releasing literally billions of pounds of savings that some baby-boomers will inevitably now transfer into the UK's overheated property market ... the potential effect on house prices could be even greater." Britain's annuity market is the biggest in the world, bigger than those of France, Germany and Italy combined, countries where generous state provision of pensions means there is less incentive to save into private pension schemes.
Shares in many of the major pension providers have been battered by the chancellor's decision to give everyone control over their own pension pot and continued to slide on Thursday.
Resolution, which owns brands such as Royal and Sun Alliance, was the biggest faller among FTSE 100 firms, down 5%, while Partnership – a specialist annuity company – slid 13% after losing more than 55% in the hours after the budget.
Analysts at Barclays Equity Research predicted the £12bn-a-year market for annuities could crash by two-thirds to £4bn within the next 18 months."
But the pensions minister played down fears of the death of the annuity. Webb said the government was simply giving people a choice about what to do with their savings. "I don't think it's the business of the government to try interfere in what happens in families," he told the BBC.
Webb added: "We anticipate that annuities will continue to be an important part of retirement provision and the Financial Conduct Authority will be continuing with its review of the workings of the annuity market to ensure that consumers get maximum value for money from their hard-earned pension savings.
PWC expects British companies to follow American companies in introducing far more workplace-based advice for employees faced with tough choices at retirement: "We're calling it 'the new paternalism'. Companies don't have the appetite to offer guarantees on pensions for employees, but do worry if they are doing the right thing by offering defined contribution [stock-market-based] schemes and want to give more assistance," said Hommel.
Osborne said in the budget that he was setting aside £20m to enable savers to obtain free, impartial face-to-face advice on what to do with their pension pots.
Many advisers are already recommending that savers dump annuities in favour of 'drawdown' schemes that pay an income and let people draw down the cash in their later years. Tony Clare, pensions advisory partner at Deloitte, said: "Scrapping the annuity rules is likely to lead to a huge growth in income drawdown, which we calculate could increase retirement income by about 15%."
27% Invest the money elsewhere or put it in bank account
21% Keep it invested it in a pension scheme
19% Buy or pay off a car
14% Pay for a holiday
12% Clear other debts
5% Help family members
4% Purchase an immediate annuity
17% Other
Source: Challenger Retirement Income Research, Australia, April 2012
1 June 2014 The maximum that can be invested in premium bonds will rise to £40,000.
1 July 2014 The New Isa begins, with an investment limit of £15,000 a year – an increase of £3,480 on the 2013-14 limit. Any Isa taken out between 6 April and 1 July will be automatically converted into a Nisa.
Limit on junior Isas will rise from £3,720 to £4,000.
August 2014 National Savings & Investments to offer two £1m premium bond prizes a month, rather than one.
January 2015 Two fixed-rate savings bonds – known as "pensioner bonds" – will be launched by NS&I for those aged 65-plus. Up to £10bn worth of the bonds will be issued, with an investment limit of £10,000 per product. The one-year version will pay around 2.8% interest. The three-year bond will offer around 4%.
April 2015 The government will scrap the effective requirement to buy an annuity with your pension pot.
- The complex and little-known 10% starting rate of tax for savings will be abolished and replaced with a new 0% rate. At the same time the amount of savings income that can benefit from the new rate will rise from £2,880 to £5,000. This means anyone with a total income of under £15,500 will pay no tax on their savings.
October 2015 Pensioners will be able to buy extra state pension worth up to £1,300 a year. They will be able to purchase up to £25 a week in additional state pension by making voluntary national insurance contributions (NICs). Full details of the scheme - which will be open for 18 months - will be confirmed later
George Osborne's budget on Wednesday – in which he declared that "no one will have to buy an annuity" – swept away most of the regulations on pensions, freeing savers to do what they like with their retirement savings, starting from April next year.
And on Thursday pensions minister Steve Webb said it would be "their choice" if retirees spend their pension pots – which average £30,000 – and end up relying on the state pension.
Judging by the experience of Australia, a huge number of the 400,000 who retire with a pension pot in Britain every year will indeed choose to blow their savings on holidays and cars. And those with bigger-than-average pots will purchase property – particularly buy-to-let – which could further inflate house prices.
But some experts also predicted that pensioners might be too scared to spend, and instead leave their cash in low-interest accounts providing a meagre income even worse than current annuity rates.
Australia introduced compulsory workplace saving (called 'superannuation') long before Britain introduced auto-enrolment, but it does not require people to buy an annuity on retirement.
Research by Australian investment management firm Challenger found that one-third of savers used their pension cash to buy a home, pay off an outstanding mortgage or make home improvements such as new kitchens or conservatories. One in five splashed out on a new car, and one in seven spent at least some of their pension on a holiday.
The evidence from down under makes grim reading for Britain's annuity providers; when given the choice, only one in 25 Australians now buys an annuity – where an insurance company provides an annual income in return for receiving the pension pot.
In the US, another country where annuities are not mandatory, most people take their pension money as cash rather than buy an annuity.
Marc Hommel, global pensions leader at accountants PWC, said: "Where people have a choice, about 70% choose to take the cash. I'm personally not overly worried about it; you can see insurers lobbying against it, but in practice, people are going to learn to be more responsible with how their handle their retirement money."
He added: "When Ford introduced mass production of cars, people worried then about whether you could trust millions of people to drive cars."
James Lloyd, director of the Strategic Society Centre thinktank described the reforms as "a policy catastrophe" that will see some people "spend and splurge" while many others will leave the cash in low-paying savings accounts.
"The evidence suggests they will sit on their savings with a depressed retirement income, or run out of money altogether. It will also lead to pretty miserable circumstances for millions of people. It replaces the security and peace of mind of an annuity with insecurity and fear."
Others, Lloyd said, will be tempted to purchase a buy-to-let property for the income it will provide.
He added: "Treasury advisers may have not anticipated that they are releasing literally billions of pounds of savings that some baby-boomers will inevitably now transfer into the UK's overheated property market ... the potential effect on house prices could be even greater." Britain's annuity market is the biggest in the world, bigger than those of France, Germany and Italy combined, countries where generous state provision of pensions means there is less incentive to save into private pension schemes.
Shares in many of the major pension providers have been battered by the chancellor's decision to give everyone control over their own pension pot and continued to slide on Thursday.
Resolution, which owns brands such as Royal and Sun Alliance, was the biggest faller among FTSE 100 firms, down 5%, while Partnership – a specialist annuity company – slid 13% after losing more than 55% in the hours after the budget.
Analysts at Barclays Equity Research predicted the £12bn-a-year market for annuities could crash by two-thirds to £4bn within the next 18 months."
But the pensions minister played down fears of the death of the annuity. Webb said the government was simply giving people a choice about what to do with their savings. "I don't think it's the business of the government to try interfere in what happens in families," he told the BBC.
Webb added: "We anticipate that annuities will continue to be an important part of retirement provision and the Financial Conduct Authority will be continuing with its review of the workings of the annuity market to ensure that consumers get maximum value for money from their hard-earned pension savings.
PWC expects British companies to follow American companies in introducing far more workplace-based advice for employees faced with tough choices at retirement: "We're calling it 'the new paternalism'. Companies don't have the appetite to offer guarantees on pensions for employees, but do worry if they are doing the right thing by offering defined contribution [stock-market-based] schemes and want to give more assistance," said Hommel.
Osborne said in the budget that he was setting aside £20m to enable savers to obtain free, impartial face-to-face advice on what to do with their pension pots.
Many advisers are already recommending that savers dump annuities in favour of 'drawdown' schemes that pay an income and let people draw down the cash in their later years. Tony Clare, pensions advisory partner at Deloitte, said: "Scrapping the annuity rules is likely to lead to a huge growth in income drawdown, which we calculate could increase retirement income by about 15%."
Australian experience
32% Buy a home/pay for home improvements/pay off mortgage27% Invest the money elsewhere or put it in bank account
21% Keep it invested it in a pension scheme
19% Buy or pay off a car
14% Pay for a holiday
12% Clear other debts
5% Help family members
4% Purchase an immediate annuity
17% Other
Source: Challenger Retirement Income Research, Australia, April 2012
What happens next?
27 March 2014 Changes to rules on defined contribution pensions take effect. Currently only those with less than £2,000 in a pension can take it as cash. From 27 March this will rise to £10,000 for any individual pot. Those who have saved in several different schemes will see the maximum rise to £30,000.1 June 2014 The maximum that can be invested in premium bonds will rise to £40,000.
1 July 2014 The New Isa begins, with an investment limit of £15,000 a year – an increase of £3,480 on the 2013-14 limit. Any Isa taken out between 6 April and 1 July will be automatically converted into a Nisa.
Limit on junior Isas will rise from £3,720 to £4,000.
August 2014 National Savings & Investments to offer two £1m premium bond prizes a month, rather than one.
January 2015 Two fixed-rate savings bonds – known as "pensioner bonds" – will be launched by NS&I for those aged 65-plus. Up to £10bn worth of the bonds will be issued, with an investment limit of £10,000 per product. The one-year version will pay around 2.8% interest. The three-year bond will offer around 4%.
April 2015 The government will scrap the effective requirement to buy an annuity with your pension pot.
- The complex and little-known 10% starting rate of tax for savings will be abolished and replaced with a new 0% rate. At the same time the amount of savings income that can benefit from the new rate will rise from £2,880 to £5,000. This means anyone with a total income of under £15,500 will pay no tax on their savings.
October 2015 Pensioners will be able to buy extra state pension worth up to £1,300 a year. They will be able to purchase up to £25 a week in additional state pension by making voluntary national insurance contributions (NICs). Full details of the scheme - which will be open for 18 months - will be confirmed later
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