Few people think too carefully about their pensions and savings for retirement. However, the Treasury and the government always seem to be thinking about those for the average citizen (and not always to the pensioner’s advantage). Indeed, Chancellor George Osborne only recently announced further changes to the current pension system.
Under proposals which will come into effect in 2015 (providing the necessary legislation becomes law), pensioners will have more freedom and choice as regards their pension arrangements. Or will they?
Previously, pensioners have always been able to take 25% of their pension in a tax free lump sum. However, usually that has involved buying an annuity with the remainder. Under the Chancellor’s proposals, from next April, those over 55 will be given the choice to take a series of smaller lump sums, as opposed to one; for both options, though, the first 25% will be tax free. Essentially, more freedom and choice will be given to savers. In a further spirit of generosity, under the Chancellor’s plans, the rule that you have to be 55 or older to get your pension has been relaxed- to an extent. If savers try to get to their pension before 55, the old tax rules will apply, with a minimum of 55% being taxed. Further to that, financial advisers and analysts are warning younger workers that the current trend will that 55 age limit being raised over the coming decade.
Additionally, you do not have to be retired to take the money. Those still working will be allowed access to their pension funds, be they public or private. People will be able to take small lump sums from their private, employer pension fund even while still contributing to it. However, the same taxation threshold (the first 25% of each drawdown being tax free) will still apply. Further to this, there is also no minimum income needed to be able to take the drawdowns, the Treasury has confirmed.
However, this is by no means compulsory; the changes are merely another choice for pensioners. Whether they want to drawdown their pension immediately, carefully over time, or keep it as it is, is entirely up to them. Those pensioners and savers who do want a guaranteed income for life will still be able to buy annuities. However, those annuities will be on their own terms, rather than being forced down that particular savings route. To consider these matters from a different perspective, insurance companies have for many years found selling annuities as profitable; as such, any drastic changes to that would not be welcomed by the big insurer or annuity providers. The fear from banking regulators are that the annuity providers might seek to miss sell such annuities. Regulators such as the FCA will be examining this matter closely, and ensuring consumer protection in this matter.
These proposals will essentially give pensioners more control and say over their hard earned pension funds. However, savers should be reminded that with such freedom and choice comes responsibility- in this case, the responsibility to take charge carefully and prudently of their savings.