While plans for savings proved to be the biggest surprise in this year's Budget, the Chancellor also confirmed several measures to do with pensions. Here, we outline the two key updates, and what they could mean for pensioners.
This particular change had been confirmed by the Government earlier in the week, but the Chancellor reiterated it in his Budget. You can read more about it here, but essentially, the pension freedoms will be extended to those already locked in an annuity contract – they'll be able to "sell" the income they receive, and can take the money as a lump sum or can re-invest it in a drawdown arrangement.
Osborne said he wanted to ensure that those already in retirement have the same freedoms as everyone else, and while the flexibilities have been largely welcomed – it'll give those who had no option but to buy an annuity the chance to reconsider, potentially allowing them to find a better way to use the money – there are concerns about how it could work in practice.
Richard Eagling, head of pensions at Moneyfacts.co.uk, comments: "While the desire to extend pension freedoms to current annuitants is commendable, the practicalities make this a potential minefield. There are numerous questions that need to be answered satisfactorily, in particular, how will existing annuities be valued fairly when they are sold?
"Early estimates have suggested that those selling an annuity may only get back a maximum of around 70% of the value of it, in which case it is unlikely to be an appealing option for many individuals. The Government will need to tread carefully to ensure that retirees receive as much value from their existing annuities as possible."
This is why those who may be tempted to sell their annuity should give it careful consideration, ideally seeking help from a financial adviser. The Government is even considering making regulated advice a legal requirement for anyone looking to sell, but in the meantime, make sure to seek advice yourself.
From next year, the Lifetime Allowance will be reduced from £1.25m to £1m, being one of the latest measures to curb the size of very large pension pots. It means that anyone with a pension pot over £1m will be subject to an additional tax charge on the amount above the limit: they'll be charged 25% for any income taken, or 55% if they choose to take their pension as a lump sum.
This means people with the biggest pension pots could face a hefty tax charge when they come to use it, and although the Chancellor says that less than 4% of pension savers will be affected in the short-term, the move hasn't been well received.
Specific concerns relate to the fact that, although the limit seems high, those who have carefully saved are effectively being penalised. Others who start saving from a young age and have relatively well-paid jobs could find they hit the limit, too, particularly if their investments perform well, while long-serving civil servants with final salary pensions could be disadvantaged as well.
There are also concerns that growing life expectancies mean people will need bigger pots in order to ensure a comfortable retirement income for 30 years or more, but the lower allowance means many could be dissuaded from doing so, at a time when the Government is trying to encourage pension saving.
"Yet again the temptation to tinker with pensions has been too difficult for the Government to resist," said Richard Eagling. "The Lifetime Allowance has now been cut from £1.8 million in 2011/12 to £1 million today, and constantly moving the pension goalposts does little to aid long-term retirement planning and undermines attempts to restore confidence in pensions.
"Given the radical shake-up to the pensions landscape set to be introduced from April with the onset of greater pension freedoms, it would have been wise to resist any further changes."
So, will you be affected by any of the announcements? There's certainly even more to think about when it comes to pension saving, and ensuring you make the right choice is vital to ensure a comfortable standard of living throughout retirement. Make sure to seek the right advice and see how the changes affect you.
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