The countdown to the pension reforms has well and truly begun. From April, anyone aged 55+ will be able to access their pension savings as they see fit, offering more flexibility than ever before. There'll be no obligation for most people to buy an annuity, but the question is, will you still want one? According to research, the jury's still out…
April will mark the biggest change to the pensions system since its inception, and the additional flexibility has been largely welcomed by consumers, many of whom would only have had the option of annuitising under previous rules. Many were effectively tied into this decision, mainly because of the size of their pot, their income levels and the prohibitive tax charge of 55%, which meant taking out any more than the 25% tax-free lump sum allowance would have been counter-intuitive.
Now, things are set to change. Consumers will still be able to take the first 25% of their pot tax-free, but the rest will be charged at their nominal rate of tax, making it a much more viable possibility for those that want to be in control of their cash. Drawdown requirements will change, too, meaning those seeking flexible drawdown only need a guaranteed annual income of £12,000 (down from £20,000), while capped drawdown limits have been increased to allow higher annual withdrawals. This all means that annuities may not be the clear choice they once were, and perhaps explains why so many people are opting for alternatives.
Sales of income drawdown products, where retirees can take an income from their pot while keeping the remainder invested, have increased considerably since the Budget announcement. Figures from the Association of British Insurers (ABI) show that sales of drawdown plans reached their highest ever level towards the end of last year, having more than doubled in number from 2013. Conversely, sales of annuities fell markedly over the same period, falling by 56% over the year.
It seems that many consumers are waiting to see what impact the changes will actually have on the market, with a large number delaying their retirement income choices until the freedoms are fully available. Unfortunately, this may not be the best approach. The significant drop in sales and clear lack of demand has meant annuity rates have also fallen, so those waiting to see what happens in April could well be disappointed with the rates on offer.
There's no right or wrong decision when it comes to securing a retirement income – it's an entirely personal choice and depends on your own specific circumstances – but for many people, annuities could still be worth considering. They're the only retirement income solution that can offer a guaranteed income throughout retirement, as unlike drawdown, there's no risk of seeing your pot run dry. Some may be tempted to withdraw the full amount, but that requires careful investment decisions to avoid running out of cash in later life.
Deciding how you're going to secure a retirement income is one of the biggest decisions you're likely to make, and the new flexibilities mean it's more important than ever to be prepared. Make sure to seek suitable advice from a qualified financial adviser, or start the process by consulting our no obligation annuity planner to discuss your options and see if annuities could be a viable possibility.
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Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.
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