Government announces radical tax change to end compulsory annuitisation

The government has announced a radical shake-up of the at retirement market by effectively ending compulsory annuitisation.

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The government has announced a radical shake-up of the at retirement market by effectively ending compulsory annuitisation.

The government has announced a radical shake-up of the at retirement market by effectively ending compulsory annuitisation.

In today’s Budget, Chancellor George Osborne (pictured) said from April 2015, the government will change the tax rules to allow people to access their defined contribution (DC) pension savings as they wish from the point of retirement.

Osborne said: “Thirteen million people have defined contribution schemes, and the number continues to grow. But most people still have little option but to take out an annuity, even though annuity rates have fallen by a half over the last 15 years. The tax rules around these pensions are a manifestation of a patronising view that pensioners can’t be trusted with their own pension pots.

“I reject that. People who have worked hard and saved hard all their lives, and done the right thing, should be trusted with their own finances.”

He added: “I am announcing today that we will legislate to remove all remaining tax restrictions on how pensioners have access to their pension pots. Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want. No caps. No drawdown limits.

“Let me be clear. No one will have to buy an annuity.”

Under the new system, from April 2015 regardless of the size of their DC pension pot, everyone will be able to either have access to full withdrawal of their pension savings, purchase an annuity or enter income drawdown, and potentially other products created by providers.

It will still be possible to take a quarter of a pension pot as a tax free lump sum on retirement, as today, but instead of the 55% tax that exists now if the rest of the pot is taken, anything else taken out of a pension will simply be taxed at normal marginal tax rates – as with any other income. So not a 55% tax but a 20% tax for most pensioners.

The government said it recognises that under the new system it will be important that people are equipped to make decisions that best suit their personal circumstances and has therefore announced it will introduce a new guarantee that everyone who retires with a DC pension will be offered “free and impartial face-to-face guidance” on their choices at the point of retirement.

The announcement was broadly welcomed by the industry, with head of retirement insight at Fidelity and chairman of Annuity Direct, Alan Higham claiming the changes represented  “a brave new world for retirement planning”.

He added: “It is right that people should be trusted to make decisions on how to spend their own money.  The changes will effectively remove the regulatory bias that exists at the moment which means too many people buy annuities at the wrong time and for pretty poor value. It is also right that everyone should be offered impartial expert help to enable them to make the right decision.  The industry needs to help people spend their money safely so that they enjoy the best retirement possible.”

The National Association of Pension Funds (NAPF), however, said the decision was “perplexing”.

Chief executive Joanne Segars added:  “There are many unanswered questions today’s announcement – not least how a free impartial guidance service will be established within twelve months. Additionally, the effect on defined benefit schemes will need to be tested as the cost and funding implications for these schemes could be significant.

“It is concerning that there appears to be little robust modelling to reassure us the Government has understood the risk that a number of people will run through their pension pots far too quickly. We fear these reforms, without careful scrutiny, will leave a large swathe of people vulnerable to poverty in old age. ”

 

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