Retirement pensions will change in April 2015. The changes announced in the Chancellors budget last week revealed a radical relaxing of restrictive pension rules that means people will have complete freedom – or as some would see it, the burden of responsibility – to decide how to manage their own money in retirement.
Baby boomers saving into a workplace pension scheme will be able to access all of their savings from the age of 55 and with less tax to pay if they choose to do so.
This is a dramatic shift away from the traditional annuity – an insurance product bought with pension savings, which can provide a fixed income for life – towards self-management.
Since the financial crash in 2008 annuity rates have been falling dramatically and many baby boomers who have been forced to buy an income annuity in the last few years have seen a considerable reduction in the annual amount they might have expected to get prior to 2008.
Pensions experts are saying ‘Savers and those with good-sized pension funds will feel far better off. With historically low interest rates many pensioners have seen their savings and income depleted with no hope of any improvement until this welcome surprise announcement.
‘Even smaller savers are being helped, with higher amounts of pension money being available as cash lump sums for smaller pension funds.’
However before you rush out on a spending spree it's important to understand that you will need to show great restraint in coming years to avoid the rapid depletion of savings earmarked to pay living costs once you've stopped working.
What changes immediately is the rules on small pensions.
Previously the retirement pension rules are that anyone with pension savings of £18,000 or less can take the entire sum as cash under ‘trivial commutation’ rules on or after their 60th birthday.
A quarter of the pension pot can be taken as a tax-free lump sum. All of
the individual pots you wished to cash in had to be converted within 12
months of the first.
As well as the £18,000 allowance, a maximum of two pension pots that were
worth less than £2,000 had to be taken as cash.
The change means that anyone with total pension savings worth up to £30,000 can take it all as cash. As now, up to a quarter can be taken tax-free, while three quarters is taxable.
Separately, you can also exchange up to three pots, each worth £10,000 or less, for a cash lump sum – five times higher than previously.
This will benefit anyone who has more than £30,000 in pension savings but has up to three smaller pension pots from previous employment.
If you are retiring between now and April 2015, think twice before automatically purchasing an annuity.
If you have the choice it may be worth deferring taking your retirement pensions until April next year. If you are already in the process of agreeing to an annuity, many of these plans can be cancelled within 30 days of receiving or signing an application.
Anyone who wishes to draw their 25 per cent tax-free cash before April 2015 can do so under existing drawdown rules and still benefit from next year’s reforms once they are introduced.
However, if you are planning to retire after April next year there will be three options available to you:
It would still be wise to discuss the options with an independent financial advisor who will take into consideration your personal circumstances.
There will be some people who will still benefit from the regular income that an annuity gives them. Drawing down the entire contents of your pension pot and then being responsible for choosing the best investment for it could be a responsibility that some don't care to have. There are many risky investments that can go wrong and your life savings could be wiped out.
Laith Khalaf, pensions expert at investment broker Hargreaves Lansdown, says: ‘With people able to access their retirement pensions early and legitimately without the big tax penalties, these reforms have reduced the leverage of pensions liberators who have been persuading some to cash in their pensions early.
‘However, people will need to be aware of the scam merchants who will inevitably try to get their hands on the massive amount of money that will be available.’
You can find help and information from a number of sources, including the Money Advice Service.org.uk or find an independent financial adviser using the website Unbiased.
Pick-a.org is also a new directory of more than 1,000 advisers and annuity brokers that can help, which was set up by the Pension Income Choice Association.
If you speak to an annuity broker remember that an annuity is one choice, but not the only one.
For more detailed information thisismoney.co.uk/money/pensions/article