How will the changes affect me?
From April 2015, savers who’ve paid into a contribution pension – also called money-purchase pensions or defined contribution (DC) schemes – will no longer need to exchange their plan for an annuity at retirement. Instead, when you reach 55, you’ll be able to withdraw your money as you wish, subject to your marginal rate of income tax – 20 per cent if you’re a basic-rate taxpayer – and scheme rules. This will affect 300,000 retirees every year. You will still only be able to take 25 per cent of your cash tax-free.
“This is the biggest transformation to our pensions system since its creation,” says Prime Minister David Cameron. “By no longer forcing you to buy an annuity we will be giving you, people who have worked hard all of your lives, the freedom to decide how you spend the money you have put aside.
“These changes are part of our long-term economic plan to ensure our economy delivers for people who work hard and want to get on in life. Together with the new state pension, which will benefit around 650,000 women who reach state pension age in the first ten years, you will have greater financial security in your retirement and a clear foundation to build your savings on.”
What is an annuity?
An annuity gives you a guaranteed lifetime income, but rates are at an historical low and we’re not always confident we’re getting the best deal, plus you can’t access the capital. But, if you’re not great with money this may be a good thing as it could stop you from spending your pension pot too quickly. You’ll still be able to buy an annuity under the new rules, but you won’t have to.
Where can I get advice?
The Government says everyone who retires with a contribution pension will be offered free guidance from April 2015. “The success of these reforms rests on whether this guidance will help people make informed decisions about using their retirement savings wisely,” adds Caroline Abrahams from Age UK.
If you’re in poor health or a smoker, you may be able to get extra money with an enhanced annuity. Call The Pensions Advisory Service on 0845 601 2923, . An independent financial advisor can also provide advice, visit www.unbiased.co.uk to find a professional advisor.
What are the alternatives to buying an annuity?
- Use a New Individual Savings Account (NISA) You can now save up to £15k per tax year.
- Income drawdown Allows you to draw an income from your pension while keeping it invested. “If your investments do well and you don’t draw too much, you may get a higher level of income than with an annuity,” says Danny Cox from Hargreaves Lansdown, independent financial provider.
- Invest in property “Many pensioners are likely to use the cash to buy a house,” says Property Tycoon author Ian Samuels. “The anticipated property boom is likely to be driven by pensioners escaping poor-value pensions.”
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