Budget 2014: Radical pension overhaul to benefit retirees

Access to defined contribution pension pots is to be radically overhauled, in measures announced in Wednesday's blatantly pre-election Budget.

The government says the aim is to allow people freedom to access their pension savings as they wish, subject to their marginal rate of income tax.

A number of immediate changes have been announced, including:

A reduction in the level of guaranteed income required in order to qualify for "flexible drawdown" (with no limits on the amount of pension income that can be drawn annually), from £20,000 to £12,000.
An increase in the capped income drawdown limit from 120% to 150% of the payout from an equivalent annuity. This means that those who don't qualify for flexible drawdown still have an alternative to annuity purchase.

With effect from April 2015, all tax restrictions have been removed on the options open to pension investors at retirement.

They can still take up to 25% as a tax-free lump sum, but if they wish to withdraw up to their entire pension at any time, they will be taxed at their marginal tax rate - 20% for most retirees.

At present, withdrawals in excess of 25% of the pension pot are taxed at 55%.

In addition, there will be no obligation to buy a lifetime annuity, though that option is still there. Investors will have a free choice between an annuity, income drawdown and other retirement products on the market.

To help them make that decision, chancellor George Osborne proposes to introduce guaranteed access to free, impartial advice for everyone when they retire. Up to £20 million over the next two years has been set aside to fund this service, but no details have been released on how it will be provided.

Advisers and wealth managers have welcomed the "roll back of the nanny state".

Adrian Walker, retirement planning manager at Skandia, describes it as 'the final nail in the coffin of forced annuities'.

Tony Clare, pensions advisory partner at Deloitte, says: 'Income drawdown accounts for about 15% of the UK's £11 billion annuity market, and these changes will make it much more widespread.

"About 400,000 people buy an annuity every year, and many could increase their retirement income by about 15% a year using income drawdown."

Stephen Ford, head of investment management at Brewin Dolphin, forecasts that the changes "will result in the almost immediate death of the annuity - which we have long called for".

He adds: "It is a huge change in the flexibility of the pension system, with lower taxes and higher lump sums."

This article was written for our sister website Money Observer

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Good idea - I've missed out again I think - taken my pension 3 years ago via an annuity.  I am also one of the unfortunate ladies who have to wait until I am 66 for my State Pension - fed up!!