UK Government to Scrap Compulsory Annuity Purchase Age Rules

Jul 17, 2010
Carol Finch

Government Ends Compulsory Annuity Age Limit - Photo by jfg

Following interim changes to the annuity purchase age rules, the UK government has announced that it will go ahead & scrap compulsory annuities altogether.

An announcement from the coalition government on the 15th July 2010 indicates that compulsory annuities could be scrapped from April 2011. This would mean that pensioners would not have to purchase an annuity by a specific age and could give some retired people better access to their pension savings. What do these changes mean?

Current Age Deadlines for Compulsory Annuitisation

Plans to scrap the annuity purchase age were announced in the budget of June 2010. At this point, the age when annuities had to be taken out was changed from 75 to 77 years as an interim measure. On the 15th July 2010, the government released an outline of what would happen in the future.

Compulsory Annuities to be Scrapped in April 2011

This recent announcement outlines how the annuity system will work from next year. The primary point is that the compulsory age limit will be scrapped. At the moment, a consumer can take some of their pension out as a cash withdrawal but the rest has to be converted into an annuity by the time they are 77.

It will still be possible for people to spend their pension savings on annuity purchases if they wish but they will have the flexibility to choose the right time to do so. In the recent past, many have ended up with lower pensions due to falling annuity rates, leaving some in real financial difficulties. Others would simply have preferred not to take out annuities at all but had no other choice.

Pensioners Given More Flexibility to Draw Down From Pension Savings

The changes also give consumers more flexibility when it comes to spending their pension savings if they opt not to buy annuities or to delay a purchase. There will be a system of drawdowns that allow the withdrawal of cash from pension savings. In many cases, pensioners will have caps put on to limit how much they can withdraw every year.

However, if a pensioner can prove a set minimum income, then they may be able to withdraw unlimited sums. The income level here has not yet been announced but it is thought that an individual will have to show that they have enough money for the rest of their retirement so that they will not go on to ask for state help later in life.

Will Pensioners be Better Off When Compulsory Annuities are Scrapped?

These changes will give retired people more flexibility to choose if and when they convert pension savings into annuities. Removing compulsory age limits would, for example, allow the individual to ride out low interest rates (if they can afford to) and wait until annuities give better returns before making a purchase.

Some may not, however, be able to take full advantage of the projected drawdown rules. If savings are low, then their only option may be to buy an annuity. Being able to bypass this system completely may be an option open to mainly more wealthy individuals.

Those interested in learning more about the government's retirement plans and the annuitisation process may find the following articles useful:

Sources: BBC Online ("Pensions: Proposals to relax annuity rules"); The Guardian ("Compulsory annuities to be scrapped"). Accessed online 17th July 2010.