Pensions and the 2014 Budget

Following this week’s budget announcement, it looks as though pensioners have won the freedom to use their entire pension fund as they wish, which could lead to fewer people buying annuities.

What changes were announced in the Budget?

The restrictions that had previously been placed on retirement savings will be lifted from April next year, giving them much more freedom. At the moment, pensioners are able to take a quarter of their pension, tax-free, when they reach pension age. Although this remains unchanged, there will be cuts on the tax applied when taking the other 75% of cash out of these savings. This means that pensioners can spend their entire fund as they so choose. Many experts believe that the result will be fewer pensioners buying annuities, which give pensioners an income for life, and instead taking a larger fund.

What it means for you

If you are paying into a workplace pension that is based on the fund’s performance rather than your final workplace salary, this will affect you. According to recent statistics, this counts for around one in five employees. In 2012, 28% of employees were making payments to final salary pension schemes, whilst 17% were paying into defined contribution schemes. This left the remainder of employees not paying into a pension at all.

The auto-enrolment scheme, which came into force in 2012 has meant that 11 million workers have been put into a pension scheme which they can opt out of at any time. Most of these people will have been enrolled into a defined contribution pension scheme, and will be affected by these changes – and this is what could have prompted the announcement in the first place, given that this would greatly increase the amount of people who would spend their pension fund on an annuity when they retired. The Government could therefore be accused of forcing the millions of people that were auto-enrolled to buy terrible-value annuity products.

The problem with annuities is that they are affected by interest rates, and with the fall in interest rates there has been a fall in the amount of income that people are receiving. Once a person buys an annuity, then they are locked in at that rate with no chance of it increasing with improved interest rates. In addition, if you should pass away the remainder of your fund cannot be passed on without taking out a very expensive annuity, which is taxed at 55%.

The Financial Conduct Authority recently issued a report stating that millions of pensioners were being unfairly treated by annuity companies, and those that were worse off were those with the most amount of money put aside for retirement.

Get advice

If you would like advice on your pension and how these changes could affect you, contact us today for advice.

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