LV= and Just Retirement have each launched one-year fixed-term annuities in response to the recent post-Budget shakeup to the pensions system. The reforms, which come into force in April 2015, will mean that anyone aged 55 or over will be able to take their entire pension pot as cash if they wish to do so, rather than having to buy an annuity.
Bridging the gap
The new products launched by LV= and Just Retirement consist of one-year fixed-term annuities, and are designed for people at the brink of retirement who want to defer making a long-lasting decision about how they will take their pension income in retirement until new rules come into effect next year.
Pensions are being radically transformed under plans announced in the 2014 Budget. From April 2015, retirees will be given far more freedom over how they use their pension fund. Here we explain how the forthcoming changes could affect you.
How are pensions changing?
The most radical changes will come into force in April 2015. Upon reaching retirement age, savers will have access to all the money in their pension pots and will, after tax, be able to do more or less what they want with it.
Under current rules, savers can take up to 25% of their pension pot as a tax free lump sum upon retirement. If you want to take a larger lump sum, you can, but if you go above certain limits you have to pay a 55% tax.
Under the new rules, this facility will remain but the tax on withdrawing the rest of the cash will also be cut to standard income tax rates, making it easier for people to use their entire fund as they wish.
The state pension age could rise to 69 by the 2040s, it has been announced.
In his Autumn Statement today, Chancellor George Osborne announced that as well as the potential for a lower age limit of 69, the existing plans to raise the state pension age from 65 to 68 will now be brought forward to the mid-2030s – a decade earlier than the date originally proposed, which was 2046. The move is projected to save the taxpayer about £500bn over the next 50 years.
The change means that, potentially, people who are in their teens and twenties today could face working into their seventies before they become eligible for state benefits.
Timing an annuity purchase can be a difficult decision – buy now and you could risk missing out on rising rates; delay and you could end up with a worse rate in the future. There seem to be mixed signals in the annuities world at the moment, leaving many older people with a dilemma – should they buy now or wait and see what happens?
There are encouraging signs that annuity rates are starting to rise – a welcome development for older people who have saved for years for their retirement.
Annuities are purchased in order to turn pension savings into annual retirement income – and they hit a record low point last summer. However, several of the major annuity providers have increased their offers in recent times. Annuity rates tend to move up or down in line with the interest paid by the Government on the bonds it sells to investors. This interest rate is called the gilt yield, and annuity rates reflect the yield on certain types of gilts.
New research from Standard Life has offered some interesting insights into the savings habits of people approaching retirement age in the UK. The study found that more than four times as many UK adults invest in cash ISAs (41%) than stocks and shares ISAs (9%).
According to the research, older investors are most likely to take risks and chase higher returns by saving in stocks and shares ISAs. Standard Life found that 11% of investors aged 55 plus use their ISA allowance to invest in stocks and shares, compared with just 7% of those in the 35-44 age group.
Investors can put up to £11,520 in a stocks and shares ISA in the current tax year, of which up to £5,760 is eligible for a cash ISA.
ISAs are overtaking pensions for the first time ever in terms of popularity with savers. According to the Office of National Statistics, we collectively put £14.3 billion into our personal pensions in the 2010/11 tax year. This sounds fairly substantial – until you compare it with the £15.8 billion that the British public invested in stocks and shares ISAs the same year. While pensions have traditionally been seen as a safe way to save for retirement, successive changes to the system coupled with the lack of security caused by the demise of final salary schemes, has understandably left many savers wondering if an ISA might be a better home for their hard-earned money.