The rules say that retirees who don’t purchase a pension annuity must do so by age 75, and the government has rejected calls to change this. With volatile stockmarkets around the world crippling pension fund values, the government came under a great deal of pressure to raise the age of compulsory annuitisation to 80 or abandon it completely, but they wouldn’t budge.
Those who have not bought a pension annuity by the time they reach age 75 have to do so, or transfer to an alternatively secured pension (ASP) – a way of continuing drawdown but an unsuitable choice for most people.
Pension annuities offer a stable, guaranteed income in retirement and are bought by the vast majority of retirees, although new products combining annuities and income drawdown have emerged recently.
ASP offer income levels of between 55 and 90 per cent of GAD (government actuary’s department) pension annuity rates on your 75th birthday, whereas income drawdown (used as an alternative to annuities before 75) allows up to 120 per cent to be taken. This is quite poor when compared to annuities, which are more effective at 75 and are guaranteed.
One advantage ASP has is that surplus funds can go to your dependants when you die (in the form of income). Those dependants must be a surviving spouse or partner and any children under 23 who are in full-time education, which tends to rule out most grown-up children. Payments on death outwith this are subject to a punitive tax charge of up to 82 %, making ASP unattractive for the vast majority of investors.
To consider an ASP you would need to have a strong financial position with assets other than the pension fund and have a pension pot of £100,000 at the very least, or a very substantial and secure alternative source of income to risk the equity markets after 75.
If you are considering options to an annuity purchase at retirement seek advice.
