Budget 2014: Osborne pension reforms 'end culture of annuity as default option for investors'

David Thorpe  19 Mar 2014 | News - Comment now

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Budget 2014: Osborne pension reforms 'end culture of annuity as default option for investors'

George Osborne announced sweeping changes to pension and income drawdown rules in his 2014 Budget

In his Budget speech today, chancellor George Osborne promised that ‘no one needs to buy an annuity' as he unveiled a package of reforms that will ultimately mean an end to restrictions on how people withdraw money from their pensions.

Previously, an individual could take 25 per cent of their pension pot as a lump sum, tax free, at the age of 55, but had to pay 55 per cent tax on any further cash withdrawals. This penal tax rate has now been abolished, meaning that any investor who takes more than 25 per cent as a tax-free lump sum will only pay their marginal rate of income tax on the balance. This is 20 per cent at the basic rate, 40 per cent at the higher rate, or 45 per cent for those earning over £150,000.

From April 2015, investors will be able to withdraw cash from their pension as and when they want.

For more information about the new rules and how they will affect your options for drawing an income at retirement, download this free guide.

The chancellor confirmed that in future everyone will be entitled to free advice on their pension options, with £20 million set aside by the government for the purpose.

Laith Khalaf, head of corporate research at Hargreaves Lansdown, said, 'What the government is saying is "it's up to you to decide when you want to take money out", but you will pay tax at your marginal rate on the withdrawals.'

Khalaf added: 'It's a very significant reform, but it's positive. It gives people greater freedom to do what they want with their pension savings and will attract more people to save in pensions, because they are now being treated like adults.'

James Baxter, a partner at Tideway Wealth, commented that the low rates currently available on annuities would mean that in practice, 'most who get the government's free advice will be told not to buy an annuity'.

He believes this will 'end the culture of the annuity as a default option for pension investors'.

READ MORE: Buying an annuity with your pension: the pros and cons

In the wake of Osborne's speech, markets anticipated a deadly impact on the annuity market, with sharp falls in the share prices of annuity providers such as Legal and General (down 11 per cent) and Just Retirement (down 42 per cent).

Khalaf acknowledged that 'there were dangers' to allowing pensioners free access to their entire pension pot. But he said that the prospect of paying a higher rate of tax would make it unattractive to withdraw large amounts all in one go.


Changes to drawdown rules

Before all restrictions on withdrawing cash from pensions are removed in April 2015, interim changes are being introduced this month which make the current pension drawdown rules more flexible.

There will be a reduction in the amount of guaranteed income a pensioner needs to enter what is called 'flexible drawdown', which entitles you to withdraw as much as you like from your pension each year, with no restrictions.

The previous £20,000 minimum guaranteed income needed for flexible drawdown is to be reduced to £12,000 from 27 March 2014.

In addition, those with less than £12,000 in guaranteed income will be able to withdraw up to 150 per cent each year of what they could have earned from an annuity, as opposed to the current limit of 120 per cent.

READ MORE: What pension investors should do in the wake of the Budget 2014 reforms

Baxter noted that with the state old age pension currently providing just short of £6,000 a year, pensioners with even a small workplace pension could come close to the new £12,000 income needed to enter flexible drawdown.

He calculated that investors would need a £100,000 pension pot to buy £6,000 of annual income, taking them up to £12,000 guaranteed income including the state pension.

Khalaf said that the pension reforms announced in today's Budget mean that 'drawdown will effectively disappear as we know it' from April 2015. 'What you'll get is a drawdown plan that doesn't put a cap on the withdrawals you can make – in essence, a drawdown plan with no limits,' he added.

Find out which companies are a better investment as a result of these reforms, and which are likely to lose out

Related topics: Fees and charges, Pensions

Post a comment

Merlin Aravis

Monday, 2nd June 2014

Hi Nick, Thank you for the reply. Should be fascinating to see how they structure the tax free sum relative to withdrawals. Ideally I'd draw income and pay the marginal rate of tax and leave the tax free sum that is uncrystallised to grow. In my dreams! Still, the new rules will be fantastic for me. I will take 42K per anum pay c.7K in tax and not have so much pressure to keep my SIPP growing.

Nick Britton

Monday, 2nd June 2014

Hi Merlin – that's a good question. There is no change planned to the 25% tax-free lump sum, so you will still be able to take 25% of your pension tax-free. As to how this will work together with the new, looser rules for income drawdown, I am not sure this has been clarified yet. It could be that every time you withdraw money from the pension, 25% of it can be taken tax-free and you pay your marginal rate on the rest (provided you have not already taken your full 25% lump sum in one go). However, we need to wait for further clarification from the Treasury on exactly how the new rules will work especially for those who are midway through drawdown.

Merlin Aravis

Saturday, 31st May 2014

Hi Nick, I have a SIPP, due to ill health at 42 I started drawing it down incrementally. The SIPP's total value is £1.5m. There is £1.2m that has not been crystallised. At the moment I crystallise 40K per anum, take 10K tax free and use the income drawn down to give a total of c.20K per anum. How will the new system work in relation to taking income from the pension, will it only be allowed on the crystallised, how will the 25% free lump sum be worked out relative to what is crystallised and uncrystallised?

Nick Britton

Tuesday, 20th May 2014

Hi Michael, please see my answers to Sharon and Jean below. If you have bought the annuity already, there is not much you can do to reverse this, but check with your annuity provider just to make sure. As it stands, there is no mechanism for 'cashing in' an annuity and neither the government nor the opposition have any plans to change this. Partnership Assurance has started to offer annuities that can be cashed in within 12 months (following the Budget) but this won't help you much if you already have the annuity.

Michael Wood

Monday, 19th May 2014

i also have an annuity to the value of 46 000 pounds.Wiil I be able to draw-down the whole amount in 2015 or do you think the existing rules to annuities will continue?

Nick Britton

Monday, 31st March 2014

Hello Jean – as in my answer to Sharon below, there's not much you can do if you have already bought the annuity, unless you are still within the cancellation period (often 30 or 60 days). Check with your annuity provider just to make sure, but don't hold your breath: annuity purchases are usually irreversible. See here for more details on cancellation periods - http://tinyurl.com/nunscau

Jean Gall

Friday, 28th March 2014

totally confused ? I receive a monthly amount of 35.00 from an annuity of £17,500 .The lump sum would be of far better benefit to me than £35.00 a month but I have no choice due to legislation.Is there anything I can do?

Nick Britton

Thursday, 27th March 2014

As far as I understand David, the answer to your question is yes. However, please note that George Osborne's plans haven't become law yet so no-one can say for sure that they will happen, or guarantee that they will not be reversed by a future government (though it appears the Labour Party supports them). One option is to do nothing until the rules are clearer, assuming you can wait for the tax-free cash. If your wife takes the tax-free cash now but doesn't buy the annuity, she has technically gone into drawdown and can withdraw up to 150% a year of what's called the GAD rates - for more info, see http://www.whatinvestment.co.uk/investment-decisions/sipps-and-retirement/2401507/the-what-investment-guide-to-income-drawdown.thtml - After April 2015 the government intends that this restriction will disappear and withdrawals from your pension can be as much or as little as you like. Your wife should check with her pension provider if she hasn't done so already and you should seek professional advice if you're unsure.

David Evans

Thursday, 27th March 2014

My wife who is 56 has just been made redundant and was going to take her tax free lump sum and set up an annuity with her £66,000 pension pot, that was until the recent budget announcement. What we'd like to know is if it is possible to still take her 25% tax free lump sum now and then after April 2015 take the remainder at an estimated sum of £7,000 pa which would keep her income below the lower tax threshold.

Nick Britton

Monday, 24th March 2014

Hi Sharon. Yes, according to what George Osborne has said you will be able to access your whole £23,000 pot from April 2015 if you want. (This is his intention - it hasn't gone into law yet). As for your annuity, this is a contract for life so it is unlikely you will be able to get out of it, unless you bought it very recently (i.e. in the last 30 days) in which case you may still be within the cancellation period. See this link for more info - http://tinyurl.com/nunscau

Sharon Lees

Saturday, 22nd March 2014

I have got a small pot matures April 2015 only 23000 can I get it all in cash plus I have one of the same amount that I have got an annuity on could I cash that in also with what I have saved and the pensions I could by a small house to rent out for my pension thank you

Nick Britton

Friday, 21st March 2014

Hi Stuart - I'm not qualified to advise you but can confirm you do not have do buy an annuity. That doesn't mean that you shouldn't, though. It completely depends on whether you want/need a guaranteed, fixed income for the rest of your life, or whether you want to try to do better for yourself by leaving your money invested and take the risk that the money will run out and/or that your investments don't do as well as you expected. The changes the chancellor announced in the Budget don't really alter any of that, they will just give you the chance (from April 2015) to take as much money out of your pension as you want. In answer to your other question, yes you will pay less tax if you take the money out in stages, than if you take it all in one go. This is because you have taken your tax-free lump sum already, so you will pay regular income tax on any income you take from your pension, just as you would if you were earning the income from a job (or indeed from an annuity). If you take £82,000 in one go, you will end up paying higher rate tax that year. It could be worth getting proper financial advice on this important decision.

Stuart Frost

Thursday, 20th March 2014

was just about to take out my annuity the budget happened. What do i do ? I have £82.000. I have already taken my 25% lump free sum three years ago. I am 62. i don't work so do not pay any tax. if i take this as cash in a years time how much tax will i pay. Would i be better having the money out in stages.

Len Rumble

Wednesday, 19th March 2014

Just a small comment - lots of "concern" about pensioners spending their fund irresponsibly now that the onerous shackles are coming off. Given that those of us with a mid-size pension pot took the right decisions to save during the last 30 to 40 years, why should we now be considered spend thrifts? We know what were doing with our finances so thank you Chancellor for treating us as adults and not listening to the scaremongering insurance industry who will last get their just rewards

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