George Osborne’s unexpected reform of the pension system will make it easier to get your hands on your fund. We look at what’s changing.
Chancellor George Osborne announced sweeping changes to the UK’s pension system in this year’s Budget.
To the surprise of practically everyone, he lifted a number of restrictions on what people can or must do with their lifetime pension savings when they reach retirement.
From the end of March, thousands more people every year will be able to take the whole of their pensions as a cash lump sum.
And from next year, the government is effectively removing the obligation to buy an annuity while making it easier to take cash out of a pension.
What is happening to annuities?
In his Budget speech, Osborne said that in future "no one will have to buy an annuity".
Annuities turn a pension fund into a guaranteed income for the rest of the savers life.
But they have faced a lot of criticism recently: firstly, rates have fallen dramatically.
And financial watchdogs have warned that many people are failing to shop around and are therefore ending up with poor-value deals.
In 2011, the official requirement to buy an annuity by age 75 was removed, but for people with smaller pension pots, annuities are the only realistic way to get hold of their pension cash at present.
Easier access to money
When you retire – or at any point from age 55 – up to a quarter of your personal pension fund can be taken as a tax-free lump sum.
But at the moment, you will be taxed at 55% on any further withdrawals.
The Chancellor says that from next April, these withdrawals will be taxed at the saver’s personal rate – so basic-rate taxpayers will pay 20% instead.
This means that more people are likely to cash in their pensions rather than use them to buy an annuity.
Although this policy creates a risk that many will use their pensions to go on a spending spree, some analysts think it will encourage saving.
Tom McPhail at investment firm Hargreaves Lansdown says: "The government is finally treating pension savers like grown-ups.
"These reforms will make pension saving much more attractive for everyone and get more people saving for their retirement."
For a large number of retirees, however, annuities will still be the safest and most reliable way of taking their pensions.
Cashing in smaller pension pots
Osborne also revealed more relaxed rules about when savers can cash in smaller pension funds.
Until now, anyone with pension savings below £18,000 can take the whole amount as cash, with a quarter tax-free and the rest taxed at the individual’s personal rate.
From 27 March 2014, this limit is being raised to £30,000 as an interim measure before the new legislation comes into effect in April 2015.
As part of next year’s overhaul, the government also plans to ensure people get free advice on their pension options when they reach retirement.
McPhail adds: "It is vitally important these savers get the guidance and information to ensure they make the most of their pension when they come to draw it, so they don’t end up running out of money."
Leaving your pension invested
Another alternative to an annuity is leaving your pension savings invested in the stock market and other assets, and taking an income from it – a process known as drawdown.
This is more risky than an annuity, because the fund can lose value after you retire.
But it means savers can also benefit from stock market growth, which they can’t if they choose the annuity route.
Drawdown will become more widely available under the new proposals.
From 27 March this year, people will be able to take more income from drawdown schemes.
Ros Altmann, a former government pensions adviser, says: "The overall message is, pension savings are going to be more flexible at the point of retirement.
"You will be able to save more into pensions knowing that there will be less restriction on what you can do with the money."
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