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6 things you need to know about annuity changes

6 things you need to know about annuity changes

Category: Annuities

Updated: 13/08/2014
First Published: 13/08/2014

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

A few months ago the Chancellor announced the biggest shake-up to the pensions system in years, and it's changes to annuities that caught a lot of pre-retirees' eyes. It has the potential to completely transform the annuity landscape and gives those approaching retirement a lot more freedom when it comes to spending their pot, but just what do the changes mean? Well, we've broken it down for you.

  1. From April next year, you'll be able to access your defined contribution (DC) pension pot as you wish from the point of retirement, with no obligation to buy an annuity.
  1. You'll still be able to take up to 25% of your pension pot as a tax-free lump sum – known as the Pension Commencement Lump Sum (or PCLS) – but there'll be more flexibility in how you can spend the rest. You can withdraw it in one go, which will be taxed at your nominal income rate (rather than at the current level of 55%), or you can use the remainder to purchase an annuity or leave it invested in a drawdown pension.
  1. The trivial commutation limits have already changed. If you have overall pension savings of £30,000 or less – up from the previous limit of £18,000 – you can take the full amount as a lump sum from the age of 60. You can also take up to three pots, valued at up to £10,000 each, as a lump sum, up from the previous small pot limit of £2,000. Bear in mind that your tax-free allowance is still 25%, with any more than that being taxed.
  1. The amount of guaranteed income you'll need to access flexible drawdown has also been reduced. A drawdown pension allows you to draw an income from your pension fund, with the remainder staying invested. Under a flexible drawdown arrangement there's no limit to the amount you can draw from your pot each year, but you'll need a retirement income of at least £12,000 per year in order to do it – this has been reduced from the previous income requirement of £20,000.
  1. Capped drawdown limits have been changed, too. Under a capped drawdown pension there's a maximum amount you can withdraw from your pot each year, but this has now been increased to 150% of an equivalent annuity (up from the previous limit of 120%).
  1. Despite the changes, annuities will still be the only product that can provide a guaranteed income throughout retirement, and for this reason they're still likely to be looked upon favourably by many retirees.

As you can see, a lot's changed. The new rules offer welcome flexibility and give people more choice in how they can spend their pension pot, as under previous rules the majority of retirees – those that didn't have small pension pots and therefore couldn't opt for trivial commutation, and those that didn't have big enough pots or a large enough guaranteed income to consider drawdown – would have effectively been tied into an annuity, or face a tax charge of 55% for withdrawing more of their pot.

Of course, annuities could still be the right choice for you, as it all depends on your individual circumstances. There's a lot to think about, so getting the right advice will be key – the Government's additional promise of a guidance guarantee for those approaching retirement was another welcome announcement in this year's Budget, but in the meantime consult our annuity planner or contact an adviser to discuss your options.

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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.