Updated: Wed, 19 Mar 2014 19:30:00 GMT | By Press Association

'Radical changes' to pension rules

The rules around pension savings are to be relaxed

The rules around pension savings are to be relaxed

The Chancellor unveiled "radical" changes to the way people will be able to access their retirement income and the biggest shake-up to the taxation of pensions in almost a century.

The rules around pension savings are to be relaxed, so that people will find it easier to cash in smaller pension pots and no longer feel forced to use their savings to buy an annuity.

The shake-up triggered a big fall in the share prices of leading pensions providers, with Legal & General down 13% and Aviva off 8%.

George Osborne also pledged £20 million over the next two years to develop a new "right to advice" with consumer groups and industry bodies.

This will mean that everyone who retires with a pension pot which could be used to buy an annuity will be offered free, impartial face-to-face advice on what their options are. This could also help people who do want to buy an annuity to shop around for the best deal.

Mr Osborne told MPs: "Most people still have little option but to take out an annuity, even though annuity rates have fallen by half over the last 15 years.

"The tax rules around these pensions are a manifestation of a patronising view that pensioners can't be trusted with their own pension pots.

"I reject that. People who have worked hard and saved hard all their lives and done the right thing should be trusted with their own finances."

Unless someone has a "gold plated" pension deal such as a final salary pension, they often use the money they have built up in their pension pot to buy an annuity when they retire, which gives them the security of a fixed yearly income for the rest of their lives.

But controversy has been growing over annuities in recent years amid plunging rates and fears that many people are unaware that they could possibly get a better deal by shopping around rather than sticking with their existing pension provider.

Around 13 million people are in defined contribution (DC) pension schemes, which could involve them buying an annuity when they retire, and the numbers continue to grow as the Government's landmark scheme to automatically place people into workplace pensions rolls out.

Under the current system, unless total pension savings amount to less than £18,000 or an individual pension pot is worth less than £2,000, the funds end up being converted into an income, which tends to involve buying an annuity.

But rule changes from next Thursday mean that around 400,000 people will be able to access their savings in a more flexible way in the next financial year, the Government said.

The changes will almost double the size of the amount of overall pension savings that someone is allowed to take as a lump sum, to £30,000. The size of an individual pot that someone can take as a lump sum will increase five-fold to £10,000.

The shake-up will also cut the amount of guaranteed income that someone needs in retirement in order to access "flexible drawdown", where you can siphon money out of your pension pot, from £20,000 a year to £12,000 per year.

Mr Osborne said: "These measures alone would amount to a radical change."

The Government is also legislating for an overhaul of the pensions taxation system, with the plans expected to be in place by next April.

At present, it is possible to take one quarter of your pension pot tax-free on retirement. But instead of the "punitive" 55% tax that is charged if someone aged over 55 tries to take the rest under the current system, any further amount taken out of their pension under the changes to be introduced next year will be charged at normal marginal rates as with any other income, which will be a 20% rate for most pensioners.

Mr Osborne said: "What I am proposing is the most far-reaching reform to the taxation of pensions since the regime was introduced in 1921."

Chris Sanger, head of tax policy for Ernst & Young, said Mr Osborne's "great granny giveaway" could encourage more pension saving.

He said: "Perhaps the most significant announcement for those on the brink of retirement is the abolition of the 55% tax rate drawdowns from defined contributions schemes.

"Its replacement - a tax at the pensioner's marginal rate at the time of withdrawal - will completely alter the calculation for those deciding whether it is worthwhile saving for their pension. In many cases it will make saving for a pension much more attractive."

Paul Macro, a partner at retirement consulting firm Mercer, suggested the Budget, which also includes plans for greater flexibility for people saving into tax-free Isas, could be a "step on the road" to aligning pensions and Isa savings more closely together.

He said: "Consumers will need more support in making sure they acquire the right product at the right time at the right price on an ongoing basis."

A recent probe into the annuities market by the Financial Conduct Authority (FCA) found that people with smaller pension pots generally face a tougher time trying to buy a good retirement income.

It found that people with pots of less than £5,000, and to some extent those with savings of up to £10,000, tended to be offered worse rates and less choice on the open market than people with larger funds.

Pensioners' campaigners welcomed the announcements.

Age UK said in a statement that the "rigid" pensions system has become increasingly "out of step with the reality of contemporary working lives".

It continued: "We are also very pleased that guidelines are to be introduced to offer pensioners and those approaching pension age impartial face-to-face financial advice.

"Giving people a real choice about how and when to use their pension savings is the right approach, but it must be an informed choice so the advice available to them when they make this crucial decision needs to be first-rate."

Otto Thoresen, director-general of the Association of British Insurers (ABI), said: " These are important reforms for savers and it is crucial to get them right.

"It is right for people to be offered a range of options to generate retirement income, and it is crucial to ensure that customers have the information they need to make the right choice for their circumstances.

"The guaranteed lifetime income provided by an annuity can play an important part in discussions with customers considering their options."

Mr Thoresen said insurers have already introduced reforms to help customers get the best retirement deal and they look forward to playing a key role in ensuring that the reforms deliver better outcomes for consumers.

Ros Altmann, an independent pensions expert, hailed the announcements as "a Budget for savers at last" and one which is "undoubtedly" aimed at boosting votes with an election on the horizon.

Dr Altmann said: "Savers and those with good-sized pension funds will feel far better off and have been pleading for some help - at last it has arrived."

Legal & General said it is "well-placed" to continue to develop a suite of good-value products.

It said in a statement: "The guidance regime outlined by the Chancellor will be vital in ensuring that many pensioners do not make choices they subsequently regret."

Zurich UK Life chief executive Gary Shaughnessy said the ABI's code of conduct already gives people a right to a conversation facilitated by a pension provider on the options available to them.

He said: "If this is extended to a requirement for full financial advice with personal recommendation, however, this will incur additional costs, which consumers could end up paying.

"It is important to strike the right balance between advice and cost-effectiveness and we look forward to engaging with the Government to get this right."

Shadow Chancellor Ed Balls said reforming a nnuities "is a good thing" but warned it was a "big step" and said the implications needed to be worked out.

"Will people with ordinary-sized pension pots be able and encouraged to withdraw all of their pension savings from their pension pot and either try and invest it themselves or spend it? And if they do, what happens when the money runs out? Who then picks up the tab?"

He added: "You could save tax advantages through your working life if you are on a very high income and then move all of that money into inheritance-style trusts to avoid tax after the age of 60.

"We need to understand what the implications of this are."

20/03/2014 08:34

a ruse to claim more tax for the deficit this coalition has increased to unprecedented high .

£15000 for the banks to use and play on the free market, they will laugh all the way to their off shore islands and multi million £ homes while they reap every day the equivalent in your savings pot in to their own .  a good investment can earn the gains daily while you receive a very very,  very, small return  per annum

billions wiped of the industry from pensioners who are receiving a pension now are stretched  will see a reduction in their pension funds even further .

thanks Mr & Mrs Camosbourne 

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