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Money matters: Sea change for retirement savers

Bill Saunders
Bill Saunders

New pension rules have seen annuity sales plummet. If you are not up to speed, now is the time to find out more, says Bill Saunders, head of financial planning at Acumen Financial Planning in Aberdeen

The government has now announced the final piece of its pension revolution – and it is yet more good news for pension savers.

The 55% tax charge payable when pension funds are passed on after death is being abolished.

In future, pensions will pass down to the next generation tax-free for people who die before the age of 75.

Those who inherit the pension pot of someone who dies after reaching their 75th birthday will pay tax at their marginal rate.

This will encourage people to keep more money in their pension funds for longer, and is another nail in the coffin for annuities; any money that has been used to buy an annuity cannot be passed onto beneficiaries unless there is a guarantee attached.

In his Budget earlier this year, Chancellor George Osborne announced one of the biggest changes to pensions for generations.

From April next year no one will be forced to buy an annuity with their pension fund.

Since Mr Osborne’s announcement, sales of annuities at Legal & General have fallen a whopping 43% – solid evidence of the sea change that is upon us.

How could these changes affect you, and even if you are years away from retirement, what should you be doing about it now?

An annuity is a financial product that is used to convert a pension pot into a guaranteed income when someone retires.

Annuities have become increasingly unpopular in recent years because, due to low interest rates, they are producing low levels of income.

For example, a 60-year-old man with a £100,000 pension fund looking for an index-linked income in retirement can expect to receive an initial income of less than £3,000 a year.

If inflation runs at say 3% per annum, he would have to live until he was 83 just to get his money back.

Although alternatives to annuities have been available for years, these are not suited to everyone.

From April 2015 it will be possible to draw whatever you want from your pension, subject to normal income tax rules.

This will generally mean that the first £10,000 of income is free of tax and the next £31,865 will be taxed at 20%.

It will be possible to draw greater amounts of income in the earlier years of retirement when, hopefully, you are fitter and able to enjoy it more.

Those with part-time work and variable income can change the level of their private pension income to suit their circumstances.

This is undoubtedly excellent news for those saving for retirement, when you consider that full tax relief is still available on contributions paid into pension plans.

For many people it will make a lot of sense to concentrate on building up their pension fund, rather than channelling money into other forms of savings such as individual savings accounts.

That said, with freedom comes responsibility and fears have been raised that pension pots could be blown in the early years of retirement – leaving older pensioners to rely on the state in later years.

Lifetime cashflow modelling can help those with more complex affairs to ensure they don’t run out of money.