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19 March 2014 last updated
Radical changes to pension annuities announced in Chancellor's Budget

Chancellor George Osborne has announced radical changes in the 2014 Budget to the way people take their pension benefits with no need to buy an annuity at retirement and the ability to access the full fund as a lump sum, draw income over time or buy a pension annuity.

From April 2015 there will be 320,000 people retiring with defined contribution pensions that will have complete freedom on how they access their pension but some changes will occur from March 2014.

Currently about 75% buy an annuity either from their existing provider or another provider using an open market option after they have taken their tax free lump sum.

People now have the option of accessing their pension fund as a lump sum less tax at their marginal rate and can spend this money as they see fit.

People could also opt to draw their income from an invested flexi-access drawdown or take a fixed term plan with all their options available in the future.

 
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How the current system works

Currently people do not have full access to their pension at retirement which must remain in the pension regime although they do not need to buy an annuity. Taking the whole pension fund would incur a 55% tax charge.

However, from April 2015 for people taking their benefits from a defined contribution pension, such as a stakeholder or personal pension, after age 55 and deciding to do so as a lump sum, the tax charge will be their marginal rate . This means the tax they pay will be either 0%, 20%, 40% or 45% for that tax year.

The current options allow you to take your 25% tax free lump sum and are as follows:

  For small pots of £2,000 or less you can take this as a lump sum if you are aged 60 or over.
  If the overall value of your pensions are under £18,000 the trivial commutation rules allow you can take them all as a lump sum.
  For funds larger than £18,000 about 75% of people buy a pension annuity which involves exchanging their fund for a guaranteed income for their lifetime.
  An alternative to annuities is capped drawdown either as an invested or fixed term plan where an income of up to 120% of an annuity could be paid allowing full flexibility for future options.
  Where there is a guaranteed income of £20,000 a fund in flexible drawdown can be used to to draw any income which is taxed at your marginal rate.


Changes from 27 March 2014

There will be some immediate changes in March this year with greater freedom to access your pension funds allowing you to take you to take your 25% tax free lump sum:

Increase the amount for small pots from £2,000 to £10,000 and the number of posts that can be taken from two to three irrespective of total pension value.
   
Increase the trivial commutation amount that can be taken as a lump sum from £18,000 to £30,000.
   
For capped drawdown and fixed term plans the limit for withdrawal will be increased from 120% to 150% of an annuity.
   
For flexible drawdown the level of guaranteed income required will be reduced from £20,000 to £12,000.


There was a negative reaction in the equity markets to insurance companies with Legal & General shares lower by 14%, Partnership lower by 56% and Just retirement down by 42%.

Related internet links:
FT - Biggest change in generation for pensions
BBC - Tax changes to boost pensioners
Telegraph - Savers and pensioners to benefit from tax overhaul
Flexi-Access Drawdown
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