Weekly Update August Monday 2nd 2021
The importance of annuity death benefits
Anyone who has experienced the loss of a loved one will be only too well aware of the devastation and heartbreak it brings to those left behind.
Even those fortunate enough not to have gone through this themselves can surely empathise with how difficult it must be.
So imagine the additional anguish you would feel if you discover there are no further payments coming from your late partner’s annuity leaving you in financial hardship. This can be an all too familiar scenario despite the importance of proper consideration of death benefits being clearly highlighted in flashing lights in annuity providers’ product literature. It can lead to some really difficult conversations with dependants who still have a need for some level of financial support after the annuitant has died.
Whilst not everyone has a need to add death benefits to their annuity, ABI data shows that only 30 per cent of annuities taken out in 2020 had a dependant’s income payable on death of the customer taking out the annuity. This is despite ONS stats showing that 76 per cent of men and 68 per cent of women aged 65-69 are living as a couple.
It certainly feels like there is a clear gap here between clients’ need to provide for dependants on death and the choices being made by those who do value secure income for life over the flexibility of drawdown.
There are three types of death benefit that can be chosen when buying an annuity with your pension savings – Dependant’s Income, Guaranteed Payment Period and Value Protection.
Dependant’s Income – Allows for the annuity income to continue to be paid to a named dependant when the main annuitant passes away.
Dependant’s Income can be overlooked but it is an important feature to consider. If the annuitant was to pass away and the income was to stop, could the surviving dependant afford their outgoings for the rest of their life without this income?
Guaranteed Payment Period – Designed to pay the annuity for a guaranteed number of years from outset. If the customer passes away during the period, the income will continue for the remainder of the period to their beneficiaries. This can give peace of mind that income will continue for that chosen period should the worst happen and may meet a specific temporary essential income need e.g. up to State Pension Age.
Guarantee payment periods up to 30 years are available, allowing advisers to recommend an option that ensures the total gross income received is at least equal to the amount used to purchase the annuity. Even if the client ultimately chooses not to take this option, consideration helps with understanding the implications of the annuity shaping choices made. There is a clear trade-off between higher income as long as your client lives versus certainty of return on death.
Value Protection – Provides the option for the customer to protect their hard-earned pension savings pot against early death and for a lump sum to be returned to a beneficiary.
It is often said that clients don’t choose annuities because their beneficiaries get nothing back when they die – this option can help address that concern, as long as the total income already paid doesn’t exceed the protected amount chosen.
So regardless of whether any of these death benefit options are chosen, it is really important to ensure proper consideration is given to the financial implications for those who would be left behind on the annuitant’s death. And wherever possible clients should be encouraged to involve their partner or family in discussions on finance and the choices around income in retirement.
Pension freedoms age rise adds ‘further complexity’
The government has today (20 July) confirmed the minimum private pension age will increase from 55 to 57 in 2028.
Members of the firefighters, police and armed forces public service schemes will not be affected by this increase.
The change could add further complexity to the pensions system, according to some in the industry.
The normal minimum pension age (NMPA) was introduced in 2006 and it increased from age 50 to age 55 in 2010. In 2014, following the consultation on ‘Freedom and Choice in Pensions’, the government announced it would increase the NMPA to age 57 in 2028 to coincide with the rise of state pension age to 67.
Following the consultation on a proposed framework of protections this measure will legislate for the increase in NMPA.
HMRC said the measure is “not expected to have any significant macroeconomic impacts”.
Responding to the announcement, Andrew Tully, technical director at Canada Life said: “The confirmation of the timing of the increase in the normal minimum pension age will be welcome to individuals and advisers and give time for appropriate planning over the next seven years.
“However, what should have been a simple process has turned into a hugely complex mess. The process to decide which individuals retain a right to an earlier pension age is completely arbitrary, being based on the specific wording within scheme rules, which may have been written many years ago.
“It also leaves open the possibility that people will hunt around for a scheme which gives them the right to take benefits at age 55 and transfer to that before 2023. So expect frantic transfer activity over the next few years as people look to secure age 55 as their minimum pension age, irrespective of their birth date.
“It is also disappointing to see a continuation of the existing ‘block transfer’ rules. These rules are complex and can effectively stop individuals transferring to a more modern, flexible, cheaper contract simply because they want to hang onto this right to take benefits at age 55.
“The legislation as drafted adds further hideous complexity to the pension system, which might be fine for pension geeks like me but for the average pension saver will prove nigh on impossible to navigate successfully without the help of a professional adviser.”
A consultation on increasing the pension freedoms age from 55 to 57 ran from February to April this year and received 142 responses.
The change will come into effect on and after 6 April 2028. The government said the measure will impact men and women equally but will impact older people more than younger individuals.
Aegon pensions director Steven Cameron said: “The Treasury’s proposals around implementing the previously announced increase in the normal minimum pension age from 55 to 57 proved highly contentious. While the provisions offering a protected pension age to those with an existing unqualified right to access age of 55 were clearly well intentioned, they raised a number of unintended consequences including legal uncertainty and complex communication challenges.
“One particular concern was that individuals who do have an unqualified right might have been put off transferring to a better value scheme in future if by doing so they lost the protection. This seemed at odds with other government pension policy. We welcome confirmation that the Treasury intends that individuals will retain a protected pension age following both block and individual transfers.
“Another particularly contentious point was the proposal to backdate changes once finalised to 11 February 2021, the date of the consultation. We welcome the new window up until 5 April 2023 which will allow individuals to benefit from an age 55 protected pension age if by then they join a scheme which, as at 11 February, already offers an unqualified right.
“These amendments to the original proposals look helpful, although scheme rule wordings will need assessed against the draft legislation to check if the intent is delivered in practice.”
Fidelity International head of pension products & policy James Carter welcomed the government’s announcement
He said: “Under the original proposals, individual transfers would have seen the loss of a protected pension age, and there would have been a retrospective impact from the proposal to link eligibility for protection to the date in February the consultation was launched. Unchanged, the protection regime could have constrained otherwise well-reasoned transfers and pot consolidations, and undermined other policy ambitions and consumer engagement in pensions. Today’s proposals ensure this is no longer the case.”
In a report published today, the Parliamentary and Health Service Ombudsman slammed the Department for Work and Pensions for failing to provide “accurate, adequate and timely” information about changes to the state pension age for women.
Legislation for the change to private pensions will be introduced in the Finance Bill 2021-22.