Osborne scraps annuity rule in U.K. budget aimed at savers

(Bloomberg) — The most eye-catching change announced by U.K. Chancellor of the Exchequer George Osborne in his budget today was the scrapping of most of the constraints on how new retirees can manage their pension savings.

Instead of being pushed to buy an annuity, 13 million savers in so-called defined contribution plans will be able to withdraw their funds gradually or in full. A 55 percent tax rate on withdrawing savings at the start of retirement will be eliminated and most retirees will face a 20 percent rate instead.

“People who have worked hard and saved hard all their lives, and done the right thing, should be trusted with their own finances,” Osborne told lawmakers in Parliament in London. He said he was proposing “the most far-reaching reform to the taxation of pensions since the regime was introduced in 1921.”

British insurers led by Legal & General Group Plc and Aviva Plc plunged on Osborne’s announcement. Prudential Plc, Resolution Ltd. and Standard Life Plc also declined, helping to erase more than 5 billion pounds ($8.3 billion) off the industry’s market value today. Just Retirement Group Plc and Partnership Assurance Group Plc, two smaller annuity providers, both slumped by more than 50 percent.

Because the Treasury expects many more new pensioners to take advantage of the greater flexibility, the policy is projected to raise money for the exchequer every year until 2031. Gains will peak in the 2018-19 fiscal year at 1.2 billion pounds ($2 billion).

Osborne’s Pledge

For individuals allowed to withdraw their entire pension pot as a lump sum because they have only accumulated a small amount, the threshold will be increased to 30,000 pounds from 18,000 pounds.

“If you’re a maker, a doer or a saver: this budget is for you,” Osborne said.

The extra yield investors demand for holding 30-year gilts instead of 10-year securities increased after Osborne scrapped the annuity rule. Pension funds have tended to hold longer-dated securities to match their liabilities. The spread widened two basis points to 79 basis points.

With a year to go before national elections, Osborne also put other measures to help pensioners and savers at the heart of his budget, reacting to a period of historically low interest rates in which the Bank of England’s benchmark has stayed at 0.5 percent since March 2009.

Osborne announced that he’s making Individual Savings Accounts — a vehicle for tax-free saving — more flexible, and allowing people to invest as much as 15,000 pounds a year in both cash and stocks and shares. That’s an increase from 11,520 pounds. The changes will take effect July 1, the Treasury said.

Pensioner Bonds