2014 will go down in the annals of financial history as the year when the pension rule book was effectively torn up. From April 2015, millions of people will have more choice regarding their pension plans following the far-reaching changes in legislation enacted during 2014.
Ros Altman, an economist and former pensions adviser to the Treasury, commented that pension savers ‘will at last be trusted with their own money, rather than being forced to choose between expensive and inflexible annuities or income drawdown products that may not suit them. A whole new pension product landscape is opening up.’
The major pension changes at a glance
- Flexible access to pensions from age 55 (57 from 2028)
- 25% tax-free amount will no longer have to be taken at once on retirement; smaller amounts can be taken over time, each with 25% tax free
- Pension drawdown restrictions relaxed
- Final salary pensions can be switched to defined contributions (but transfers from unfunded public sector schemes not allowed)
- Death benefits paid to beneficiaries on death before age 75 will be completely tax-free
- Death benefits after death over 75 subject to 45% income tax in 2015-2016 and beneficiary’s marginal rate thereafter
- Income on an ongoing joint-life annuity paid tax-free to a spouse or civil partner on death before age 75.
Annuities have received much bad press. Under the new legislation, no-one is required buy one at any age. However, the Financial Conduct Authority has confirmed that they may still have a valuable role to play in retirement planning, especially for those who prefer not to take risks and want a degree of financial certainty. So, those looking to provide themselves with a guaranteed regular income, or who fear they may outlive their capital, may choose to take out an annuity to cover their basic living costs. Those in poor health could benefit from enhanced or ‘impaired life’ annuities which can pay a higher rate of income (up to about 65% more in some circumstances).
The view in the marketplace is that the removal of those restrictions that were seen to be onerous or unfair will lead to the development of innovative new products that will be more in tune with the needs of pensioners, many of whom are likely to retire earlier and live longer.
All this new freedom brings with it added personal responsibility. The free pension advice announced by the Chancellor has since been downgraded to ‘guidance’ which won’t cover the choice of product or provider. The need for professional advice tailored to your individual circumstances has never been more important. This applies not only when you access your pension fund, but throughout your working life.
The value of the investment can go down as well as up and you may not get back as much as you put in.