The Pension jungle | Pension freedom or life annuities?

It’s interesting how pension cultures change. For a hundred years the UK was the most traditionalistic country with widespread final salary pension plans. But no more. The UK and other nations have, during the past two decades, been on the run from defined benefit plans.


The pensions landscape can be a difficult one to negotiate (Photo: Colourbox)

A modern, liberal approach
Denmark, on the other hand, only had a few plans defined by their promised benefits.

The private sector, from early on, was attracted by defined contributions (DC). Many pension plans are designed around lifelong annuities on a DC basis.

However, the ‘lifelong’ part is not a requirement as such. Consequently many plans are designed around saving both for a lump sum and for an instalment plan (rate), typically paid out monthly from 10 to 25 years. This is in essence a lump sum paid out in instalments.

Nothing is lost for the family if one dies early, but there is no lifelong pension. The plan design can however be added to. Many international pension consultant colleagues consider this to be a modern and liberal approach.

The tables are turning
The Brits have always hated being forced to take out life annuities – at the latest at  the age of 75 when many will know about their ailments and not be happy to buy an annuity.

With Chancelor Osborne’s Pension Freedom Reform, income drawdown and several tax rules will be liberated towards 2015, and the minimum required income (MRI) threshold will go from £20,000 to £13,000.

If a Brit can prove pension income above £13,000, he will soon be able to take out his pension pot at a low tax rate and no longer be forced to buy annuities.

However, the Danes have seen an opposite development. Contributions above 50,900 kroner are no longer deductible towards instalment pensions. Excess contributions must be spent on life annuities.

Where’s the debate?
There hasn’t been much public debate about the whole issue. Naturally the state has a vested interest in citizens having sufficient means to live throughout their lives.  Maybe the Danish state should consider introducing a minimum required income standard?

High-income earners often have assets to dispose of in their old age, but the new Danish regime especially forces high earners and high contributors to buy life annuities.

 

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