Budget 2014: Osborne's ground-breaking changes for pensioners

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Budget 2014

In the past few months there has been a great deal of speculation as to whether the Conservative party is taking a beating by UKIP among older votes. The consensus was that the Tories needed to do something dramatic to win back the support of the grey vote.

Clearly this Budget is George Osborne's attempt to do that, with far-reaching and dramatic changes to savings and pensions. Dean Mirfin, Group Director at Key Retirement Solutions points out: "The whole retirement saving landscape has been shaken up, and the Chancellor's talk of the most far-reaching reforms since 1921 are absolutely correct. He has fundamentally changed the way people save for retirement and how they take their income."

Pensions

Osborne announced a transformation in defined contribution pensions that's so dramatic it will require new legislation - and will therefore be introduced in April 2015.

The first change is the end to a regime which forced people to buy annuities. These have offered worse and worse incomes over the years, and many thousands of savers have resented saving all their working life only to be forced into buying something they consider to be poor value with the proceeds. Now there is no compulsion ever 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. Those with small pension pots have always been able to take the lot as a lump sum - but the definition of small has been changed from £2,000 to £10,000. And people can do this with up to three separate pension pots.

The amount they can take tax-free remains the same - at 25% of the pot - however, instead of being taxed 55% on any additional sums they take out of a pension, people will be taxed at their marginal rate - which for basic-rate ratepayers will be 20%. This is likely to vastly increase the sums people take - which will boost tax income for the government.

They may then choose to draw down income from their pension pot. The income requirement for flexible drawdown will be reduced from £20,000 to £12,000. The capped drawdown limit will be raised from 120% to 150%. People will be able to draw down as much or as little as they want at any time they want.

These changes have received a warm welcome. John Fox, director of SIPP provider, Liberty SIPP, said: "These proposals finally give people ownership of their pensions. One of the biggest problems of all pension regimes to date is that people have felt that the moment they invest money, it stops being their money. It feels like they're giving it away. These changes remove that major psychological hurdle in one fell swoop and I'd expect it to encourage more people to start saving for their futures. It's empowering pension savers rather than patronising them."

To ensure people make the right decision on retirement, there will be a new right to face-to-face advice at that point. It means that people will receive help in selecting the right option for them. If they end up choosing an annuity after-all they can get help in shopping around for the best rate.

Of course, as Fox says, one of the potential downsides is that not everyone can be guaranteed to behave responsibly. He says: "I am, of course, worried about the ramifications for people who do not act responsibly and, as a result, may become dependent on the state in later retirement. Car dealers and travel agents will be rubbing their hands with glee."

Tom McPhail, Head of Pensions Research, Hargreaves Lansdown 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."

Savings

Many pensioners will continue to generate some of their retirement income from savings, so it's welcome news that the starting rate of 10% on income from savings will be scrapped - so there's no tax on the first £5,000 of income from savings.

Pensioner Bond

There will also be a new Pensioner Bond, available through National Savings and Investments to everyone over the age of 65. The rate will be set in the autumn but is likely to be around 2.8% for a one-year bond and 4% for a three year bond. There will be £10 billion issued and a savings limit of £10,000 in each.

For those who choose to save through Premium Bonds, the limits will also rise from £30,000 to £40,000 this year and £50,000 next year, and the number of million pound winners will be doubled.

ISAS

There's also excellent news for those who choose to save through ISAs. From 1 July, cash ISAs and stocks and shares ISAs will be merged into one single product. While previously savers could switch money built up in cash ISAs into stocks and shares ISAs, now they will be able to switch both ways. The overall limit will also be increased to £15,000, which is good news all round.

The reaction has been very positive from the experts, with Peter Rogerson, Mortgage and Savings Director at Virgin Money joining others saying: "Simplifying ISA rules, merging cash and stock and shares under one roof and increasing the ISA limit will encourage more consumers to save for the future".

State pension

There was little news on the state pension front in the Budget. However, it's worth noting that when Osborne introduced a permanent cap on welfare spending, he made it clear that state pensions will fall outside the cap - which should provide some confidence that the triple lock protection built into state pension increases should be here for a while longer.

Budget 2014: Winners and Losers

Budget 2014: Winners and Losers