UPDATE 1-British government shakes up pensions and savings

Wed Mar 19, 2014 1:46pm EDT

Related Topics

* Budget measures include relaxation of annuity rules

* Tax-free savings limit raised

* Insurers see shares slide, Hargreaves Lansdown jumps (Adds insurer reaction, background)

By Jemima Kelly and Chris Vellacott

LONDON, March 19 (Reuters) - British savers will be given more access to their pension pots and allowed to put away more money tax-free, in what the UK finance minister said was the biggest shake up in pensions in nearly a century.

George Osborne's announcement on Wednesday that retirees will not have to buy annuities and be allowed to take more money from their pension pots as a lump sum sent annuity providers sharply lower in a flat FTSE 100 share index.

"Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want," he told the House of Commons in an annual budget speech.

"Let me be clear: no one will have to buy an annuity."

Consultants KPMG called the proposals "a game changer for the insurance industry", which could now face lower volumes of new business in a 12 billion pound ($19.95 billion) a year market as demand for their annuity products falls away.

That perception sent shares in Legal & General, which according to Bank of America Merrill Lynch makes a quarter of its core profits from annuities, heading for its biggest daily fall in five years as its shares dived 8.4 percent. The shares were the biggest loser in the FTSE 100.

Aviva's shares close down over 5 percent, while shares in Standard Life lost over 3 percent and Prudential's fell more than 2 percent.

Britain's big insurers insisted their businesses were diverse enough to withstand any long term hit to annuity sales.

L&G said that because of its fund management business and the Cofunds investment distribution platform, it would be a beneficiary of the higher savings the reforms are aiming for.

Prudential said it welcomed measures to encourage saving.

"We believe in market-based solutions that give consumers choice and flexibility in the ways they save and draw down income in retirement," said Prudential's Chief Executive Tidjane Thiam.

Osborne called his shakeup the "most far-reaching reform" to pensions since 1921, aiming to encourage more people to fund their own retirement as the government seeks to reverse the damage caused to savings by record low interest rates since the financial crisis.

THRESHOLDS

Osborne increased the threshold at which a single defined contribution pot could be taken as a lump sum by five times to 10,000 pounds ($16,600) and cut the minimum income requirement for flexible drawdown to 12,000 pounds from 20,000 pounds.

He also said total pension savings that could be taken as a lump sum would be doubled to 30,000 pounds, with the changes to come into effect on March 27th.

Pressure to reform the annuities market has been growing in recent months.

Liberal Democrat Pensions Minister Steve Webb said in a newspaper interview in January that annuities needed a rethink as they were designed for a world in which people lived for 10 years after retiring, not 30 years.

Earlier this month the Association of British Insurers (ABI) announced wide-ranging reforms to annuities, with insurers promising to help those approaching retirement to shop around and inform them of the full range of options available.

Otto Thoresen, ABI director general said on Wednesday it was right for people to be offered a range of options to generate retirement income.

"It is crucial to ensure that customers have the information they need to make the right choice for their circumstances," he said.

The annuity market, which the ABI said was worth almost 12 billion pounds last year, was called "disorderly" in a review by the Financial Conduct Authority, the UK watchdog, which accused providers of maximising profits at the expense of savers.

Osborne also announced that Individual Savings Accounts (ISAs), which allow money to be put away tax-free, would be simplified into a single "New ISA" rather than separate cash and equity ISAs, with a new higher limit of 15,000 pounds a year, up from 11,520 pounds.

Hargreaves Lansdown, which sells ISAs, was the biggest winner on the FTSE 100 in afternoon trade, with shares up over 14 percent.

"The budget contained a lot of good news for savers and investors," said Danny Cox, head of financial planning at Hargreaves Lansdown. "The simplification of ISAs and opportunity to invest more tax free is a great boost."

But Paul Macro, savings expert at consultant Mercer, warned that allowing people to take their savings as a lump sum went against the idea of aiming for a retirement income.

"Clearly all of this is good for flexibility but does go against the 'save for income in your retirement' mantra if people can simply take all as a lump sum," he said.

Among other announcements was a new pensioner bond, which is expected to offer those over 65 rates of 4 percent over three years.

"People who have worked hard and saved hard all their lives, and done the right thing, should be trusted with their own finances," the finance minister said.

($1 = 0.6034 British Pounds) (Additional reporting by Simon Jessop and Alistair Smout; editing by Keiron Henderson)

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