Reforms open doors to fresh opportunities for the Pensions industry

Baker Tilly, a leading national provider of accounting and business services, looks at some of the implications of Osborne’s reforms for the pensions industry now that the dust has settled after the Budget.

Apart from annuity providers, it is difficult to find anyone who has a bad word to say about George Osborne’s almost revolutionary reform of pensions but now that the initial jubilation has died away, it is interesting to reflect on what some of the implications are for the pensions industry bearing in mind likely changes in demand amongst individual pensioners.

Even though people have been quick to write off the annuity industry, it is almost certain that annuities will remain the preferred option for many people especially those who have no children to whom to leave an inheritance. The main problem with annuities at the moment is that the annual returns are so much lower than what pensioners have enjoyed in the past because of markedly lower interest rates and ever increasing life expectancy. Even when interest rates recover to normal levels, it is not guaranteed that annuity rates will become as attractive as in the past simply because of the apparent acceleration in life expectancy. Many retirees will therefore be looking for alternative solutions.

The fact is that the Chancellor, in freeing up the whole pensions regime, has actually precipitated a quantum leap in choice and the more alternatives there are, the more scope there is for confusion.

Until interest rates and investment yields return to traditional levels, there is probably scope for the industry to construct new annuity products based on individual asset classes that Joe Public can readily understand. For example, instead of annuities being based on a whole raft of investment sectors with a large bias towards fixed interest government stocks, the industry might do well to provide new annuity options that give the pensioner a choice of higher risk assets which could provide superior long term returns.

Gilts have always been the bedrock of the pension edifice but, for the foreseeable future, they are unlikely to provide the returns that prospective annuity purchasers find attractive. Given the new appetite for slightly higher risk/ reward investment criteria, it may be an opportune time for insurers to offer totally new annuity products based solely on individual asset classes like residential and commercial property or higher yielding blue chip equities.

A really adventurous annuity provider might even develop an alchemy product that converts future capital growth into annuity income.

Pensioners who have already taken their 25% cash free lump sum might also want to unlock the value of their remaining fund without paying Income Tax. Pension providers and Sipp administrators might therefore want to consider setting up loan facilities enabling pensioners to borrow against their funds. This would be particularly useful for pensioners who would pay tax at a marginal rate in excess of 40% on any cash withdrawals over and above the 25% limit.

One thing is for sure ; the Chancellor’s reforms may have opened as many new doors for the pensions industry as they have closed. It just requires some imagination to take advantage of them.

If you need to find out more information on how the latest pensions reforms please visit the Baker Tilly website http://www.bakertilly.co.uk/sectors/pensions.aspx