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.