* UK to scrap requirement for pensioners to buy annuities
* Britons to face lower penalties for using savings early
* Finance ministry sees little immediate market impact
* Industry levy to fund free guidance for pensioners
(Adds bond and equity market reaction, industry comment)
By David Milliken and William James
LONDON, July 21 Britain will give more workers a
choice to cash in their pension savings, the government said on
Monday, expanding reforms set out earlier this year that hit
insurers' share prices.
Finance minister George Osborne caught Britain's pensions
industry by surprise in March when he said he would scrap a rule
forcing many people to buy an annuity, a financial product which
converts a retiree's pension pot into a guaranteed income.
From April, people will also face much less of a tax penalty
if they access their pension savings early at the age of 55.
Osborne said on Monday that these rights would apply to more
pension schemes than originally planned, taking the total number
of people affected to 18 million, over half the workforce.
The government said it was going ahead with its plans - seen
as the biggest reform of pensions in a generation - after
consulting industry, employers and consumer groups.
"It's right to support hard-working people that have taken
the long-term decision to save for their future and I'm pleased
that the responses we had to our proposals on making pensions
more flexible have been overwhelmingly positive," Osborne said.
Osborne's Conservative Party saw a small boost in opinion
polls after the reforms were announced earlier this year
although it is now again lagging the opposition Labour party as
May's national election approaches.
Companies which sell annuities will also be able to sell
more complex products that do not pay a constant income and
allow one-off lump-sum withdrawals. Some industry experts fear
that people may be sold unsuitable investments.
"It will become increasingly difficult for ordinary
investors to discern whether they are actually getting a good
product or not," said Tom McPhail, head of pensions research at
brokers Hargreaves Lansdown.
The government will offer free guidance for people looking
to cash in their pensions, funded by a levy on the industry.
Insurers' shares were little changed. Shore Capital equity
analyst Eamonn Flanagan said the moves were largely as expected.
But prices of long-dated British government bonds fell with
30-year yields up as much as 2 basis points on the
day as investors feared the changes would reduce demand.
Insurers have traditionally bought long-dated government bonds
to cover annuity payouts.
The finance ministry said it expected the long-term effect
would be small. "It is expected that there will still be a
strong continuing demand for high-quality fixed-income assets,
including government and corporate bonds," it said.
Some analysts have said the changes could give a short-run
boost to tax receipts but impose long-term costs, if older
people decide to draw down more taxable income early in their
retirement, but potentially end up dependent on the state later.
The original plans set out in March only applied to
defined-contribution workplace pensions, in which savers build
up cash pots, most of which must be invested in annuities on
Monday's proposals extend the changes to funded
defined-benefit schemes, which pay an income based on employees'
final or average salary. Employees will not be able to take cash
from the unfunded schemes which predominate in the public
The government said most employees in defined-benefit
schemes would be better off staying in. The industry estimated
that only 10-20 percent of people in defined-benefit pension
schemes would transfer out of them.
"We don't believe that there will be a significant flight
from defined-benefit schemes, as some fear, because many people
like the security of a reliable income," said John Cridland,
director-general of the Confederation of British Industry.
However some pension schemes might need to hold more liquid
assets to enable withdrawals, the finance ministry said.
The reform plans have raised questions over how insurers
will be affected by a dip in demand for annuities if there is no
longer a requirement for retirees to buy them.
When the shake-up was announced in March, it hit shares in
firms like Legal and General, Aviva and Standard
Life who sell annuities. Those shares remain below their
The government on Monday outlined new annuity products that
allow early withdrawals and payments that vary in order to meet
the demand of retirement expenses such as care costs.
Annuities may also provide a guaranteed payout, even if the
recipient dies, for much longer than the current 10-year limit.
($1 = 0.5851 British Pounds)
(Additional reporting by Andy Bruce and Nishant Kumar; Editing
by Andrew Heavens and Mark Potter)