October 7 2015 Latest news:
Ed Foss, Senior writer
Monday, December 13, 2010
Changes in the pension rules should give people more flexibility to manage their money. But the reaction to the government’s plans has been mixed.
Savers will be given more freedom, according to the government, thanks to a planned removal of the obligation to buy an annuity with money saved in a personal pension.
From next April there will be a range of other options, which include continued investment or using a concept called “income draw-down”.
But limits will be imposed on the amount of money most pensioners can take from their fund at any one time.
An annuity provides an individual with a guaranteed income for life, but can be unpopular because none of the cash passes to the person’s estate when they die.
The government is now on the verge of taking away the obligation of people buying an annuity by the time they are 75.
John Mee, director of Lovewell Blake Financial Planning, welcomed the “extremely good news” that the government had relaxed the need to buy a pension by the age of 75.
It was a provision that reflected, he said: “Closet thinking by insurance companies that you must always buy an annuity”.
But he was critical of two other aspects of the changes. The requirement to have a pension of £20,000 a year before being able to draw cash implied that people had a pension pot of at least £250,000.
“This is far too high a limit,” said Mr Mee.
“Many people have other income in retirement such as from property, or they might have a business or other assets they’re planning to sell in the future.
“It is not realistic to prevent those in this situation drawing on some of the cash in their pension pot.”
His other criticism was on the 55pc exit charge or tax on a pension pot remaining when the holder dies, with the only exemption for donations to charities.
“It would make much better sense for the pension pot to pass down to the next generation with a requirement for them to retain the money for this purpose,” said Mr Mee. “In this way you would build up a pension fund within a family, moving towards a longer term solution to the need to generate adequate pension provision.”
And Michelle Mitchell, Age UK’s charity director, said: “Many people, particularly the relatively wealthy, will welcome proposals to liberalise the way in which they draw their pension savings.
“However we are extremely concerned about the very significant costs and risks involved with the government’s proposals to allow more people to draw income directly from their funds.
“These risks include the mis-selling of complex and expensive alternative products, damage to the annuity market, and real hardship for many pensioners in the future if the value of their investments falls or they live longer than expected.
“If the proposals go ahead, the government and regulators must ensure that anybody considering new ways of drawing their pension is fully informed of the potential risks and expense.”
Stephen Berry, tax specialist at NFU Mutual, said the rules would bring greater financial control to people at age 75.
“The proposed changes to pension legislation appear to be simpler than earlier proposals and should be welcomed in the main.
“Taking away the age ceiling for most lump sums, and removing the need to buy an annuity from a direct contribution scheme, will create greater flexibility for pension holders.
“One of the less favourable changes is the decision to increase to 55pc the tax rate on all lump sum death benefits, other than for those who die without taking a pension before age 75.”