Thousands get new pension choices

Updated: 

File photo dated 29/05/08 of a man gardening as the first phase of the Government's pensions revolution has come into force, giving thousands of people greater freedom over how they use their retirement savings. PRESS ASSOCIATION Photo. Issue date: Thursday March 27, 2014. The shake-up means that around 400,000 people will be able to access their pension savings in a more flexible way in the coming financial year. Meanwhile, the Government is also expected to make a further announcement about charges that can eat into pension savings later. Pensions Minister Steve Webb, who has previously promised a

The first phase of the Government's pensions revolution has come into force, giving thousands of people greater freedom over how they use their retirement savings.

The shake-up means that around 400,000 people will be able to access their pension savings in a more flexible way in the coming financial year.

Meanwhile, the Government is also expected to make a further announcement about charges that can eat into pension savings later.

Pensions Minister Steve Webb, who has previously promised a "full frontal assault" on pension charges, has been looking into the possibility of placing a cap on the fees charged to manage savings pots, but he said in January that any cap would need to be delayed for at least a year to give firms time to adjust.

The changes announced by Chancellor George in last week's Budget mean that from today, the size of the total pension savings that can be drawn down entirely and taken as a lump sum rise to £30,000, without incurring a 55% tax charge.

Previously, someone with a £30,000 pot would have had to pay taxes and charges of £21,000 if they wished to take this as a lump sum, but now they will pay £4,500, leaving them £16,500 extra.

The Government has also increased the size of a small pot that can be taken as a lump sum, regardless of total pension wealth, five-fold to £10,000.

It has cut the minimum yearly income that is required to access pension savings flexibly from £20,000 to £12,000.

The limit for "capped" pension drawdown has also been raised. A capped drawdown pension allows you to take income from your pension, but previously the maximum you could withdraw was 120% of an equivalent annuity. The cap has now been raised to 150%.

A 65-year-old with an average defined contribution (DC) pension pot of £44,600 would be able to take around £820 extra before tax, according to the Government's calculations.

From April next year, it will be possible for people to withdraw their DC pensions savings however they wish, subject to income tax.

The shake-up is expected to lead to fewer people using their pension savings to buy an annuity when they retire, which gives them a fixed income, usually for life.

Controversy over annuities has been growing amid tumbling rates in recent years and fears that people are not getting the best deal they could by shopping around.

Yesterday, Legal & General chief executive Nigel Wilson said the individual annuities market was expected to shrink to around one quarter of its current value, plummeting from being worth £11.9 billion last year to £2.8 billion in 2015.

Some experts have raised fears that the reforms could lead to some people underestimating how long they will live for and burning through their cash too quickly.

But they have also said it could encourage retirement saving, as people will be confident that their money will not be tied up in a place they do not want it to be.

Commentators have suggested the moves could lead to more people putting their retirement savings into buy-to-let properties and that some innovative new financial products will be launched to meet the new flexibility pensioners will have over their cash.

Around 13 million people are part of a defined contribution (DC) pension scheme and the Government's scheme to automatically place people into workplace pensions will swell their numbers in the coming years.

The Government is also changing the current rules that require people who take up to 25% of their pension pot as a lump sum to "secure an income" within six months, which usually means using your savings to buy an annuity.

It plans to include legislation in the Finance Bill to ensure people do not lose their right to a tax-free lump sum if they would rather use the new flexibility this year or next, instead of buying an annuity.

Mr Osborne said: "From today, over 400,000 hard working people will have new choices about how to invest or spend their hard-earned retirement savings.

"The pensions reforms in my Budget have struck a chord with many. The reaction to the Budget reminds us all of a simple truth: when people are given more choice over their own lives they warmly welcome it.

"These reforms are part of our long term plan to create a more secure economic future for Britain."

7 ways to improve your retirement

7 ways to improve your retirement