Retirees will no longer have to purchase an annuity with their pension pot, the Government has confirmed.
From 6 April 2011, the requirement to buy an annuity with funds from a personal pension by the age of 75 will end.
The proposal was first put forward in a consolation paper last July. The decision to scrap compulsory annuitisation is part of a raft of changes that the Treasury says will give retirees more freedom.
Until now, people have been required to purchase an annuity with their private pension pot, enabling them to draw a guaranteed yearly income throughout their retirement. Figures from the Government show that around 450,000 people purchased an annuity last year.
While people will no longer have to invest their retirement funds into an annuity, the Government has ensured that retirees are not able to spend all their money at once, then relying on the state. Fidelity International welcomed the move but said that the new rules would make little difference to many people.
A limit has been set at how much can be taken from a fund each year. As such, pensioners will only be able to spend the equivalent of the single person annuity that they could have purchased with their total pot.
The limits on what can be drawn down from a pension will be reviewed every three years. Those with more than £20,000 pension income a year will be able to draw more, although additional funds will be subject to income tax.
"This is good news as it gives those who have been able to accumulate a big enough pension pot the flexibility to use their savings in a way that best suits their circumstances as they change throughout retirement," Julian Webb, head of DC at Fidelity Investment Managers, said.
"Currently most people will still need to buy an annuity as they will not have saved enough to provide an adequate income for their retirement.
"However, as the move from final salary pension schemes to defined contribution gains momentum, increasing numbers of people in the future may have accumulated a pension pot big enough to give them this choice."
However, MGM Advantage said the end of compulsory annuitisation could cost pensioners thousands of pounds throughout their retirement.
"While anything that gives pensioners more flexibility is a good thing, people should not lose sight of the value an annuity can bring," commented Craig Fazzini-Jones, director at MGM Advantage.
"Indeed, each year somebody delays annuitising represents a year's lost income that could take years or unfeasibly high returns to make up."
The government also announced that any money left in a pension fund if the investor dies after their 75th birthday will be taxed at the rate of 55%.
"The Government's decision to lower the tax rate on funds remaining at death to 55% is good news, although we would have liked to see the level lowered even further," said Helen White, the Association of British Insurer's acting director of life and savings.
"This is, however, still a great improvement and will reduce the incentive for pensioners to empty their pots as rapidly as possible to avoid high charges on death."
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