U.K. defined contribution plan participants will not be required to buy an annuity to fund retirement starting in April 2015, announced Chancellor of the Exchequer George Osborne in his 2014 budget address Wednesday.
The chancellor said the move gives participants “complete freedom” over how they access their pension savings.
Starting in April next year, DC participants will be able to access their retirement assets as they wish from the point of retirement. As it stands, participants do not have full flexibility to access their money, with a 55% tax charge if they withdraw the whole account at once. Beginning in April 2015, participants will pay only a marginal rate of income tax on what they withdraw from their DC account. Participants will still be able to withdraw 25% of their account tax-free as a lump sum and can still purchase an annuity if they wish to.
The announcement was welcomed by the U.K.'s retirement industry.
“The radical change to the pension system, which means that around half a million people won't have to buy an annuity, will benefit the economy in the long run as more and more people draw down money from their pension and spend,” said Elissa Bayer, senior investment director at Investec Wealth & Investment, in an e-mail.
“The annuity requirement has long been seen as one of the most unattractive aspects of the private pension saving regime, patronizing people about how they could access their own money at, and in, retirement,” said Malcolm Small, senior policy adviser at the Institute of Directors, a group of business leaders from the U.K. and overseas, in a news release.
The government noted that greater flexibility within the DC market might lead to defined benefit members looking to transfer to a DC plan. According to the budget text, available on the government's website, this could be of significant cost to the taxpayer, “as these (DB) schemes are largely unfunded.” Therefore, the government intends to introduce rules to ban transfers for those in public-sector pension funds, “except in very limited circumstances.” It will also only consider transfers from private-sector DB pension funds “if the risks and issues around doing so can be shown to be manageable.”
The government is consulting on how best to implement these changes, and how to treat private-sector DB pension funds.