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Annuities – A change at sea

The Chancellor’s changes to the rules on annuities announced in the Budget might just make the difference to whether or not you can purchase your seaside home or other retirement dream.

The changes and how they will affect you

The ‘writing on the wall’ for the current annuities rules was heralded in February when the Financial Conduct Authority published its critical annuities market review. It concluded that most people could get a more generous income in retirement by shopping around for an annuity from a different provider.

Following this up in his March Budget, the Chancellor announced the Government’s plans to “… legislate to remove all remaining tax restrictions on how pensioners have access to their pension pots”.

Flexibility and choice

For those aged 55 or over, from April 2015, whatever the size of a person’s defined contribution pension pot, it is proposed that they will be able to take it how they want, subject to their marginal rate of income tax in that year. 25% of their pot will remain tax-free.

Those who continue to want the security of an annuity will still be able to purchase one – and it is important to remember that because annuities aren’t obligatory, it doesn’t mean they won’t be right for some people!

But people who want greater control over their finances can draw down their pension as they see fit – keeping their pension invested and drawing down from it over future years if they so wish.

Interim rules until April 2015

The immediate changes, effective from 27 March, allow people to have greater freedom and choice now over accessing their defined contribution pension savings at retirement. These are:

  • reducing the amount of guaranteed income people need in      retirement to access their savings flexibly, from £20,000 to £12,000;
  • increasing the amount of total pension savings that can      be taken as a lump sum, from £18,000 to £30,000;
  • increasing the capped drawdown withdrawal limit from      120% to 150% of an equivalent annuity;
  • increasing the maximum size of a small pension pot      which can be taken as a lump sum (regardless of total pension wealth) from      £2,000 to £10,000 and increasing the number of personal pots that can be      taken under these rules from two to three.

Seek advice!

The Government’s own proposals to give impartial guidance remain unclear, so ensure you seek professional help from your adviser to guide you through this ‘brave new world’ of pensions choices.

The Budget has proposed a seismic shift in the rules on annuities. For those aged 55 or over, from April 2015, whatever the size of a person’s defined contribution pension pot they should be able to take it how they want, subject to their marginal rate of income tax in that year. 25% of their pot will remain tax-free.
The choice to purchase an annuity for those who want to do so will remain in place.