UK - Tax changes in the Finance Act could leave widows facing pension poverty, Standard Life warns.
It claims the changes will encourage money purchase scheme members to strip additional benefits - such as the widow’s provision - from their pension before they retire to maximise income.
Marketing technical manager John Lawson says the problem will arise in April 2006, when workers reaching retirement must be offered a choice of four income options: a lifetime annuity, a scheme pension, an unsecured income and an alternatively secured pension.
Lawson said his concern was over the choice between a lifetime annuity and scheme pension.
He pointed out that a 65-year-old man with a £50,000 retirement fund could get more than £5000 in additional tax-free cash by allowing his scheme administrator to buy a pension with no widowís provision. Lawson described the tax-free cash incentive as a “very dangerous” piece oflegislation.
He said: “Put simply, in order to get a higher pension income, you need to drop as many bells and whistles as possible.
“You will get people app-roaching retirement and the best way to maximise their pension is not to provide for their spouses. It really is quite dangerous - particularly as older women are already the poorest pensioners.
“As everyone is now moving towards DC it could have horrendous consequences 20 or 30 years down the line - it could leave women in real poverty.”
Lawson claims a simple solution would be to change the annuity assumptions from 4%or 1/25th to 5%or 1/20th when calculating tax-free cash from a scheme pension, regardless of the actual annuity rate.
For a man with a £50,000 fund, this would give a total of £12,500 - the same amount as a lifetime annuity option.
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