Good pensions advice 'critical'

Budget 2014

%VIRTUAL-SkimlinksPromo%Fears have been raised that Chancellor George Osborne's radical shake-up of pensions will encourage some people to burn through their retirement savings and leave them vulnerable to spending their old age in poverty.

But experts also suggested that the moves, which will empower pension savers by giving them a much wider choice of what they do with their nest eggs, will lead to some people shoring up more cash.
The pensions revolution will mean many people will no longer feel forced to turn their pension pot into an annuity when they retire, which will give them a fixed income for life.

Several changes announced in the Budget will be enacted in one week's time, meaning that around 400,000 people will be able to access their pension savings in a more flexible way in the coming financial year.

The moves announced yesterday led to around £5 billion being wiped off the value of firms involved in pensions.

They come as the Government's automatic enrolment workplace pension reforms continue to be rolled out to tackle fears that people are not saving enough for their retirement, which have so far created around three million new pension savers.

Joanne Segars, chief executive of the National Association of Pension Funds (NAPF), which represents 1,300 pension schemes, described the announcements as "perplexing".

She said: "On the one hand the idea that savers can take their pension as a lump sum, albeit subject to tax, may be an incentive to save.

"However, this choice brings with it a significant burden of responsibility for individuals to understand the choices they are making.

"We know this is not always the case as people often underestimate how long they will live and overestimate how long their pot will last."

Ms Segars raised concerns about the risk that people might run through their pension pots too quickly.

She continued: "We fear these reforms, without careful scrutiny, will leave a large swathe of people vulnerable to poverty in old age."

From next Thursday, the size of the amount of overall pension savings that someone is allowed to take as a lump sum will almost double, to £30,000.

The size of an individual pot that someone can take as a lump sum, perhaps because they have only worked for a certain company for a few years, will increase five-fold to £10,000.

The Government is also legislating so that from April next year, people aged over 55 will be taxed at normal marginal rates of income tax if they want to take money out of their defined contribution (DC) pension.

At present, they are charged 55% tax if they withdraw the whole pot.

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

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.

Controversy over annuities has been mounting amid plunging rates in recent years 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.

Once you have used your pension pot to buy an annuity, which usually gives you a guaranteed yearly income for life, there tends to be no possibility of reversing that decision if you later come to regret it, perhaps because your circumstances change.

Legal & General, which saw its share price tumble by 13% after the shake-up was announced, said it expected to see savers putting more money aside as the Government was effectively transferring the risk of someone outliving their pension savings onto the pension saver.

It said that to avoid people over-spending early in retirement and running short later, contribution rates into pensions should rise and retirement ages should increase.

Think tank the International Longevity Centre-UK said that while the plans offered more flexibility, for some retirees, annuities helped to reduce the risk of them living in poverty towards the end of their lives.

It said it was "critical" that good, accessible advice be on offer to help people approaching retirement to make an informed decision.

The Financial Services Consumer Panel, a statutory body which advises the City regulator on consumers' interests, welcomed the moves.

Sue Lewis, chairwoman of the panel, said: "The proposal for everyone to have the right to free and impartial face-to-face guidance at the point of retirement is particularly welcome.

"This would really help people make an informed choice about their options for retirement income."

John Ball, UK head of pensions at Towers Watson, said the moves would mean that some pensions "won't always be pensions any more" as they will not have to provide a regular income throughout retirement.

He said: "Of those who choose not to buy annuities, many may enjoy better outcomes, but some will burn through their money too quickly and others will be too cautious about how much of their savings they allow themselves to withdraw and spend."

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Good pensions advice 'critical'

In a surprise move, the Chancellor announced today that he was scrapping the alcohol duty escalator, which adds inflation plus at least 2% to the price of alcoholic drinks.

He also said that he would be cutting the price of a pint of beer by 1p as he did last year, and that duty on whiskey and ordinary cider would be frozen this year.

The duty on alcoholic drinks has been frozen for Scotch whiskey and cider, and cut by 1p for beer.

The duty on cigarettes, however, will rise by 2% above inflation, adding to the costs faced by people unable to ditch the habit.

The Chancellor told MPs that the number of bingo halls in the UK had "plummeted" by three quarters over the last 30 years.

As a result, he has decided to halve the duty paid on the popular numbers game to just 10%. There was bad news for those who prefer to have a flutter on the horses, though.

Fixed odds betting terminals in bookies will now be taxed at a higher rate of 25%, while the horserace betting levy will be extended to include bookmakers who are based offshore.

"Support for savers is at the centre of this Budget," the Chancellor said at the start of his speech. And he did not disappoint.

The biggest surprise was a revamp for tax-efficient individual savings accounts (ISAs), with the existing cash and stocks and shares accounts being merged and the annual limit being raised to £15,000.

This is up from a planned limit of £11,880 - including up to £5,940 in a cash ISA - and will mean that savers keen to avoid risk can invest up to the full amount in a savings account.

However, older savers will also be pleased to learnt that the government is planning to launch a new pensioner bond available to anyone aged over 65 and expected to offer rates of around 4% over three years.

Not all the announcements made in the Budget were surprises. It was, for example, widely reported earlier in the week that working parents will be given up to £2,000 per child to ease the cost of child care from later this year.

The plans should help to meet 85% of the costs faced by low income families, the government said.

But all families with children under 12 will be eligible, as long as the parents' joint incomes do not exceed £300,000.

All annuity restrictions on how you control your pension pot (if you have one) will be abolished. No longer do you have to buy an annuity.
Instead, people can take more of the money as a lump sum on retirement. The total pension savings that can be taken as a lump sum will be increased from £18,000 to £30,000 on March 27th. 
Tax on cash taken out of pension pot on retirement will be reduced from 55% to 20%.

Everyone aged 65-plus has the opportunity to save with a new NS&I pensioner bond, likely to be 2.8% for a one-year bond, 4% on a three-year bond. There's a maximum £10k per bond limit though.

British drivers have been given some respite from George Osborne. The threat of a fuel duty rise has been banished in the Chancellor's new Budget. Osborne claims fuel prices are now up to 20% lower than they might have been under Labour. 

The Budget included good news for working parents who can now claim a childcare subsidy worth up to £2,000 per child.

However, families where one parent stays at home to take care of the children will not qualify for the new scheme.

There has been a lot of debate about the loophole that allows rich investors to buy properties in the UK through companies, thus avoiding stamp duty.

And now, it seems, the government has decided to take action to stop the practice. "From midnight tonight anyone purchasing residential property worth over half a million pounds through a corporate envelope will be required to pay 15% stamp duty," Osborne said.

He also announced plans to expand the tax to residential properties worth more than £500,000.

The Budget included a number of measures designed to crack down on people who avoid paying tax.

Perhaps the most significant was the announcement that the taxman will be able to take money from the accounts of those who refuse to pay.

Osborne said: "We will give HMRC modern powers to collect debts from bank accounts of people who can afford to pay but have repeatedly refused to, like most other Western countries."

"Never again" should the welfare system be allowed to spiral out of control, said Osborne, as he outlined more plans to cap welfare payments - setting the overall limit for 2015-16 at £119bn, excluding state pensions and unemployment benefits.

The cap is in line with official forecasts for welfare spending, but has been highlighted as a very political move as it will require the future chancellor to cut benefits whichever party he or she comes from.


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