The coalition and your retirement: policies so far
The new government has pledged to create more freedom in the pensions system by ditching the default retirement age and compulsory annuitisation.
Under the coalition deal struck by the Conservatives and the Liberal Democrats, the law that allows firms to force staff to finish work at 65 will be phased out.
This is a policy the Liberal Democrats had included in their manifesto.
There will also be a review to set the date at which the state pension age starts to rise to 66, although it will not be sooner than 2016 for men and 2020 for women.
The Conservatives have been vocal about speeding up the rise in the state pension age. If Gordon Brown had remained in power, Labour would have pressed for plans to increase the age incrementally between 2024 and 2046 to 68 for men and women. It is now likely to happen much quicker than that.
The Tories were also anxious to end the compulsory annuitisation for pension pots. As it stands, when people reach the age of 75 they are required to sell their pension to an insurance company and receive an annual income for life in return. The only present alternative at age 75 is an alternatively secured pension (ASP), but it can result in pension funds being taxed at 82 per cent on death, so it is far from ideal for most people.
The Tories’ wishes are now in the coalition government’s policy document, so ending compulsory annuitisation could become a reality.
Lee Smythe, partner at Killik & Co, says such a move "would be very much welcomed".
He adds: "This has been much hated by everyone forced to buy an annuity. The only concern government should have is that an individual does not become dependent on the state in old age. This would give people the freedom to plan their retirement to suit their own needs."
The Liberal Democrats have won the argument over when to start indexing the basic state pension to earnings, namely in April 2011.
Higher-rate tax relief
There is no mention of the Liberal Democrats’ plans to restrict tax relief on pension contributions for higher-rate taxpayers. Details of this could emerge in the emergency Budget, which should take place by the end of June.
Tom McPhail, head of pensions research at Hargreaves Lansdown, is disappointed not to "see any reassuring messages about preserving higher-rate tax relief" but admits the rest of the announcements "could start to reinvigorate savings and restore confidence in the pension system".
Smythe warns that as the Tories are planning to honour the Liberal Democrats manifesto proposal to raise the income tax exemption to £10,000, higher-rate pension tax relief could be sacrificed – also promised in the Lib Dem manifesto - to pay for this income tax exemption.
"The advice for those higher-rate taxpayers planning to make a pension contribution is to do so sooner rather than later," he notes.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.