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18 March 2015 last updated

Budget 2015 changes allow annuities to be sold by retired savers

The Chancellor George Osborne has proposed new changes to annuities in the 2015 Budget to allow five million retired savers to sell their retirement income for a cash lump sum or flexi-access drawdown.

The Chancellor aims to establish a second-hand market for annuities allowing retired savers to sell their income for a cash sum taxed at their marginal rate or invest in flexi-access drawdown.

Last years Budget removed the need for people retiring to buy an annuity and take their tax free lump sum and pension fund as cash less tax at the marginal rate.

A new type of pension plan called flexi-access drawdown will allow others to park their pension fund over time and draw an income to avoid paying too much tax in a single year.

Existing annuity holders have not benefited from the original changes applying only to those with pension funds and the change for annuities is likely to be popular for the over-55s running up to the election.

 
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Second-hand market for annuities

The scheme will create a new second-hand market for annuities and could be popular for institutional investors looking to secure a fixed income for their investments.

Annuity rates have reduced considerably over the years. For a person aged 65 with a fund of £100,000 in 1996 could have received an income of £10,500 pa reducing to £7,900 pa in 2008 and only £5,600 pa today.

Until the Budget last year people at retirement were forced to buy an annuity paying record low levels of income. For the person selling the annuity they could take it as a cash lump sum or place the fund in flexi-access drawdown. This would give them more freedom when taking their income and allow the fund to grow in a tax free environment.

Flexi-access drawdown would allow you to take no income or as much income as necessary from your fund on a regular basis, such as monthly, quarterly or half-yearly or as single one off payments. The plans are flexible and would allow the fund to be taken as a cash lump sum or even used to buy another annuity.

This may be beneficial due to poor health which could pay an attractive level of enhanced income using an impaired annuity.

Annuities fail to meet changing lifestyle

Annuities are inflexible contracts that require people to to know at the point of retirement their exact requirements over a lifetime, often a period of twenty years or more.

As an example, perhaps when an annuity is taken out you are single and later have a partner that you would like to provide an income on your death.

The second-hand market would offer the opportunity to change this arrangement to reflect your lifestyle at that time, rather than be locked in an annuity that no longer meets all your needs.

For smaller funds forced to buy an annuity, such as £10,000 paying an income of £10 per week, a lump sum payment could make a significant difference to their life. This is particularly the case if people have outstanding debts, such as a mortgage or outstanding credit cards, which can be cleared using this fund.

The existing 55% tax on taking cash sums out of pensions is to be abolished so the tax on a lump sum from an annuity will be at a marginal rate.

Other changes for retired savers

The Chancellor has announced a personal savings allowance to help basic rate tax savers making the first £1,000 a year of interest to be tax free and to be introduced from April 2016.

For many retired savers this will effectively create tax-free banking taking 95% of savers out of taxed savings, benefiting about 17 million people. For higher rate tax payers only the first £500 of interest earned will be tax free.

The lifetime allowance for pensions has been reduced from £1.25 million to £1.0 million.

News related stories:
Flexi-access drawdown will be used by 130,000 people says HMRC
Drawdown to benefit as the government scraps 55% pension death tax
Annuity drawdown plan would offer greatest flexibility at retirement
Budget time table risks delays for changes to drawdown and annuities
Radical changes to annuities announced in Chancellor's Budget
Related internet links:
Guardian - George Osborne in new pensions giveaway
Telegraph - New pension rules to let savers cash in annuities
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