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Following the news that George Osborne is set to announce in this week’s Budget that up to five million existing pensioners will be allowed to swap their guaranteed regular payments for a cash lump sum, Scottish Friendly has warned that such a policy is in danger of breaking the ‘generational agreement’ between pensioners and taxpayers.
Neil Lovatt, Director at Scottish Friendly, said: “This is like taking an already burning building and fuelling the flames with petrol.
“The biggest concern is that this announcement means breaking the ‘generational agreement’ that has shaped the pension industry for years. Namely, that it’s the taxpayer that has paid into the very pension pots which will now be cashed in.
“For a pension pot that’s built up over 30 years, it is estimated that around 32% per cent of the money in it will have been generated through tax relief funded by the taxpayer; for higher rate taxpayers the amount funded by taxpayers could be as high as 50 per cent(1). The main reason this tax relief was provided in the first place was so that these individuals could be supported in retirement and kept from having to fall back on social security.
“However, under the new rules, where a person already has a small income from an annuity there is nothing preventing them from switching to a single cash payment in order to spend the money on holidays or even to pass it on to their children and then fall back on the state to support them. This means the taxpayer would end up paying twice to support the current generation of retirees.”
Lovatt, continued: “Anyone who thinks that they will get a good deal by cashing in an existing annuity is living in cloud cuckoo land. The pensioners most likely to want to cash in their annuity are those that don’t see the need for long-term income, namely those in poor health. This will be known by those pricing the lump sum payment and, as such, it's more than likely that people selecting this option will be shocked to find their implied longevity - the extent to which the pricing takes into account how long they are expected to live - is surprisingly short.”
Lovatt also warns that this change is unlikely to represent great value for many clients.
“New systems will need to be built, underwriting undertaken on individual lives, advice sought and paid for and you can guarantee that there will be a large amount of costly compliance and regulation layered on to the change. None of this comes cheap, and the cost will need to be factored into the pricing. It's those that are taking advantage of the new freedoms that will need to bear the brunt of those costs.”
Eligibility to invest in a pension depends on personal circumstances and all tax rules may change.
Scottish Friendly is not responsible for the accuracy of the information displayed on externally linked third party websites. The Scottish Friendly Group of Companies consists of the following companies: Scottish Friendly Assurance Society Limited – Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Member of AFM, Member of ABI: Life, Savings and Investments. Scottish Friendly Asset Managers Limited – Authorised and regulated by the Financial Conduct Authority. Member of The Investment Association. Registered in Scotland No 187215: OEIC Managers, ISA Managers. Scottish Friendly Insurance Services Limited – Authorised and regulated by the Financial Conduct Authority. Registered in Scotland No 113007. SFIS (Nominees) Limited - Registered in Scotland No 397351. Head office: Scottish Friendly House, 16 Blythswood Square, Glasgow G2 4HJ.