The Government has devoted a lot of its recent energies to pensions reform. First we had the changes affecting contributions and membership of company schemes and now we have changes to the rules for annuities and pensions drawdown.
Savers with money in a pension fund have long complained about the rule forcing them to buy an annuity at age 75. Now the Government has removed that rule and introduced other changes as well. Briefly, the main proposals are:
- The compulsion to buy an annuity at age 75 will end
- There will be more flexibility to defer taking your pension and the opportunity to receive tax free cash after the age of 75 has also been introduced
- For those savers who might benefit from pension drawdown, there will be the opportunity to draw an income for life (within certain limits) from your pension fund, without ever having to purchase an annuity
- However, if you have a secure income of over £20,000 per year then there will be no limits on the income that can be taken from a drawdown arrangement
These new rules introduce much more flexibility and have generally been welcomed by both savers and the pensions industry. Clearly, those savers who don’t want to buy an annuity by the age of 75 and/or those who want more control over their pension will benefit.
Does this therefore mean that there will be a headlong rush into pension drawdown arrangements with traditional annuities being neglected? Almost certainly not.
The average size of a pension fund in the UK is around £30,000. Most commentators feel that a realistic starting point for drawdown is closer to £100,000. The majority of people are still likely to prefer the ‘safety-first’ option of an annuity, which gives a guaranteed income in retirement. With a drawdown arrangement you do run the risk of eroding your capital, especially if markets are volatile.
The points that savers need to consider around pensions, annuities and drawdown can be many and complex and that’s before other considerations such as taxation and the possibility of inheritance tax are factored in.
More than any other area of financial planning, this subject needs careful planning. We will be happy to explain the advantages and disadvantages of every course of action and help you take the necessary steps that will give you peace of mind and the security you want in your retirement.