Jersey has issued a consultation document on annuities which invites responses before October 31, 2001.
The Retirement Options Working Group’s paper on income drawdown was presented to Jersey Life & Pensions Society yesterday.
Currently, Jersey’s local tax system gives full tax relief for retirement savings but compels people to buy annuities with most of those savings from a limited choice of providers resident in Jersey. Only two providers, Norwich Union and Generali, offer an open market option by taking other companies’ customers’ money. In addition, annuity rates are very low at the moment.
Early indications from the working party point to a belief that while annuities must always remain an essential feature of the Jersey system there is room to give people greater freedom over how they use their retirement funds, but they should not be compelled to change to any new system.
However, people must not be allowed to use all their retirement savings in any way they wish and then ask the government for support. Therefore everyone must fix at least enough of their funds in an indexed-annuity of a sufficient amount - a minimum retirement income (MRI).
As part of a possible alternative to the current system, the working party also suggests:
*annuitised income should continue to be taxable and access to funds prohibited until the age of 50
*the MRI must be inflation proofed to at least the extent of 3% per annum
*MRI might be calculated by reference to: a proportion of the wages index; a multiple of current old age pensions; a proportion of wages in the years up to retirement; or a fixed sum
*average earnings in September, 2000 were £21,008 and one frequently used standard of defining the poverty line is 50% of average earnings. But the working party believes MRI should be set at the level of the State’s full old age pension
*everyone should, regardless of marriage or other partnership, be required to maintain their own MRI
*there should be no restrictions on the application of the residual fund, following deduction of MRI, after the age of 50. This conclusion was influenced by the fact that little can be done to attract more annuity providers into the local market place since it is too small and, therefore, people should be free to transfer the residual fund to other investment managers.
Speaking of the advantages of the current system, the working party also contended that the perception that annuities are poor value is arguably incorrect since lower yields on long dated fixed interest securities - upon which prices providers calculate annuity rates - reflect inflation expectations and “therefore, the annuity has not necessarily become poorer value relative to other instruments.”
As part of its research the working party is examining the annuity set-ups of countries including the US, Republic of Ireland, Chile, Singapore, UK and Guernsey.
Jersey Life & Pensions Society chairman Barry Dodge said the Island would most likely examine annuity systems abroad, borrow what is best then “Jerseyfy them.”
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