Options at retirement
As the dust settles on the 2014 Budget, it is clear that the most wide-ranging changes are for individuals that have pensions savings in a defined contribution (DC) scheme, such as a personal pension.
The proposed changes, which are expected to come into effect from April 2015, will give savers the choice of whether to purchase an annuity or to make withdrawals from their pension pot. This can be for up to the full amount of money held within their pension pot. The current rate of 55% for full withdrawals will be reduced with savers allowed to use a flexible drawdown plan whilst being taxed at their marginal rate.
The government has also proposed offering all DC scheme holders free and impartial guidance on the options available at retirement. There are also proposals to increase the age at which pension savings can be accessed from 55 to 57 (from 2028).
In the interim, the Chancellor announced the following temporary reforms to the pensions rules that became effective on 27 March 2014 to 6 April 2015.
- A reduction in the minimum income requirement for accessing flexible drawdown to £12,000;
- An increase in the capped drawdown limit to 150% of an equivalent annuity;
- An increase in the total pension wealth that people can have before they are no longer entitled to receive lump sums under trivial commutation rules to £30,000;
- An increase in the small pots limit, raising the size of a pension pot that can be taken as a lump sum regardless of total pension wealth, to £10,000;
- An increase in the number of pension pots of below £10,000 that can be taken as a lump sum from two to three.
Some insurers are allowing retirees that have bought annuities in recent weeks to unwind the purchase but the rules vary from insurer to insurer. The changes are expected to significantly reduce the annuity market in the UK.