In a big shake-up of the retirement system, pensioners will no longer be forced to purchase an annuity and will have much more freedom on how they access their pension pots.
In yesterday's Budget, Chancellor George Osborne announced some exciting changes for the pensions system giving individuals much more control of their money.
From April 2015, people reaching retirement age will have total flexibility on how they withdraw their pension money from defined contribution schemes – they can take all their savings as one lump sum, choose to draw them down over time or they can still opt for an annuity.
Purchasing an annuity – a guaranteed income for life – is not an easy decision for any pensioner and many have been getting poor deals. An annuity offers a good level of security and if you research the market properly then it can be a good choice, but the new rules will give pensioners the chance to make their own choices.
Pensioners will also have the option to access their entire pension pot in a lump sum at any time after they reach the age of 55 and it will be taxed at a normal rate, typically 20% rather than the current 55%.
Along with greater flexibility comes more responsibility on the individual to make the right decisions but those approaching retirement age will be given help with this in the form of free independent financial advice.
In the meantime, pensioners will still be able to enjoy greater flexibility from 27 March this year as those with total pension savings under £30,000 can now take them as a lump sum and those with defined contribution pensions smaller than £10,000 will be allowed to draw them as a lump sum.
Those selecting income drawdown will benefit from an increased limit from 120% to 150% of an equivalent annuity whilst Flexible Drawdown will be available to those with a secure income of £12,000 instead of the current £20,000.
Tom McPhail, head of pensions research at Hargreaves Lansdown, said: "The Government is finally treating pension savers like grown-ups. These reforms will make pension saving much more attractive for everyone and get more people saving for their retirement. It is vitally important these savers get the guidance and information to ensure they make the most of their pension when they come to draw it, so they don't end up running out of money."
Pensioners are winning in the savings world too after it was announced that those over the age of 65 will be able to open a new Pensioner Bond in which a maximum of £10,000 can be saved. The exact interest rates are to be set in the autumn but the assumption is that a one-year bond will be paying 2.8% and a three-year bond will pay 4%.
With pensioners long suffering from low interest rates and a confusing annuity system, these announcements will come as a great relief and hopefully give them the chance to choose the kind retirement they want and deserve.
Make the right decision with Moneyfacts Annuity Service
For more information speak to someone directly on Call 01737 233 435 (quote MF106 when you call)
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.
Moneyfacts.co.uk will, like most other websites, place cookies onto your computer’s
hard drive. This includes tracking cookies.