Taxation of Pensions Bill

Written evidence from Partnership Assurance Group plc (Partnership) (TP 18)

About Partnership

1.1 Partnership is a long established UK insurer specialising in the design and manufacture of financial products for people whose health and lifestyle means that their life expectancy is likely to be reduced. Partnership aims to offer higher retirement incomes than traditional providers through undertaking a detailed assessment of people’s health and lifestyle conditions. It is a leading provider of enhanced annuities; typically, our average customer can receive approximately 18% extra income for life, compared to a standard annuity provider, and for those with more serious conditions, potentially much more. We estimate that over 50% of people at retirement could qualify for one of our annuities.

Executive Summary

2.1 Partnership welcomes the opportunity to respond to the House of Commons Public Bill Committee’s call for written evidence on the Taxation of Pension Bill (‘The Bill’).

2.2 Partnership welcomes the Bill as we believe that more choice for those entering retirement is a good thing and increased choice should help to enable people to save for, and make informed decisions in relation to, their retirement income.

2.3 However, we believe that more consideration needs to be given to ensure that certain products are not disadvantaged by the new rules. In particular, we are concerned by measures being brought in which will see taxable ‘death benefits’ on annuities, but not on other products such as drawdown. We would also like to see additional measures to allow people to use savings mechanisms, such as ISAs, to purchase retirement income through an annuity. For those who may require long term care in later life, we would like to see proposals brought in to allow people to use their private pension savings to purchase care products, such as care annuities. We believe that these measures would enhance the current freedom and choice in pensions’ agenda.

2.4 Although the guidance guarantee is not part of this Bill, we also believe that consideration needs to be given to the risk that a potentially large number of consumers lack sufficient financial literacy and understanding to manage their funds very well over retirement. Therefore, the need for meaningful support and guidance for consumers when making complex retirement decisions is imperative.

Financial products

3.1 Partnership believes that annuity products will remain the most appropriate product for many people. Underpinning the concept of pensions saving is the wish to provide income security for the whole of retirement and to ensure that someone does not run out of retirement funds before they die. Annuity providers take on the investment, credit, inflation and longevity risk for the consumer and provide an income that will last for life regardless of changes in circumstances or investment markets. Research conducted by Partnership found that 64% of people listed a guaranteed income for life as the top characteristic of a "perfect retirement product."

3.2 Research conducted among Partnership’s customers in 2012, to ascertain what they spent the additional income received from an enhanced annuity on, demonstrated that a significant proportion spent the extra money on higher food bills (61%), heating and electricity (57%), and on meeting the costs of higher council tax and other bills (53%). We believe that this research highlights the importance of the guidance guarantee in helping consumers recognise the importance of securing a base level of income in retirement; notwithstanding their eligibility for the flat rate state pension.

Taxable death benefits on annuities

4.1 HM Treasury has announced that people with annuities will be allowed to pass on a lump sum as a ‘death benefit’ tax free. However, if the benefit is passed on as an income (as with a joint life annuity or associated guaranteed period income payment) then it will be taxed at the beneficiary’s usual income tax rate.

4.2 We strongly believe that annuities should be given the same preferential treatment as drawdown. Annuities provide a steady, guaranteed income in retirement and we believe that individuals who purchase them should not be penalised for making this choice.

Offering enhanced annuities for ISAs

5.1 Partnership believes that to further enhance the choice delivered by the pension reforms, consideration should be given to enable consumers to purchase annuities and guaranteed income with ISA funds.

4.2 We understand that in order to give effect to this it may only require S 9 d (i) of the ISA regulations relating to ‘insurance policies’ to be removed from the Individual Savings Account Regulations 1998. We do not believe any further changes to the Regulations would be necessary and imagine that this would only require a change to SIs.

5.3 Doubts have been raised by some policy makers who believe that enhanced annuities for ISAs cannot be achieved because ISA assets have to be ‘surrenderable’ within 30 days. However, Partnership does not see this as an insurmountable barrier, providing annuity providers are able to offer a market based surrender value which takes into account the market value of the assets which back the annuity and any changes in the state of health of the annuitant.

Care Annuities

6.1 Funding long term care is a growing concern with many consumes still unaware that they may have to fund all or some of their social care needs. The proposals set out in the Care Act 2014 will go a long way to helping to address some of the concerns. However, the new retirement system provides a good opportunity to encourage people to consider how they may fund any long term care needs that might arise.

6.2 To help people to fund their care needs in later life, we believe that people should be allowed to use their pension funds to buy Care Annuities which could help to ensure that they do not deplete their savings prematurely, falling back on state funding. We would encourage policy makers to look at this proposal as part of the reform package.

November 2014

Prepared 21st November 2014