The obligation to buy an annuity at age 75 or face an enormous tax bill will be removed from April next year, Chancellor George Osborne has announced.
In today’s emergency Budget, he also pledged to rethink the previous government’s policy to reduce pension tax relief for people on high incomes.
The government will shortly launch a consultation to work out the detail of ending the effective compulsory obligation to purchase an annuity. It will also introduce transitional measures for those yet to buy an annuity who will reach 75 in the meantime.
Currently people reaching age 75 have the option to buy an annuity or an alternatively secured pension. However, the latter incurs hefty tax charges of up to 82%, and is therefore not a viable option for most people.
Rebecca O’Keeffe, head of investment products at Interactive Investor, calls the announcement “fantastic news”.
She comments: “This rigid rule was one of the key hurdles facing people like me who hope to have a flexible phased retirement. For the vast majority of pensions savers it will make no difference, but for some, it removes one of the key barriers to pensions savings.
“Hopefully future reviews into other aspects of pensions, such as early access and default retirement ages, will herald a return to increasing the attractiveness of pensions in general.”
Osborne also said he would reconsider previous chancellor Alistair Darling’s tinkering with tax relief on pension contributions for higher earners. He said he had listened to the industry’s alarms over how complex the changes would be.
“However, I must also protect the £3.5 billion of revenues this policy was set to raise from high income people,” Osborne said.
“I will therefore work with industry on alternatives ways of raising the same revenue, potentially by reducing the annual allowance.”
Businesses ranging from law firms to actuarial companies welcomed the announcement.
Claire Carey, a partner at Sacker & Partners, says the previous rules were “fiendishly complicated” and is pleased that Osborne is considering simpler measures.
Government analysis shows that reducing the annual allowance (currently £255,000) to around the £30,000 to £45,000 range could raise the same amount as Darling’s original plan.
Andy Bell, chief executive of self-invested personal pension provider, adds: “The tax-relief system needed to be reformed but not by adding to the complexity of the existing system. Reducing the annual allowance is the simplest and most cost-effective way of distributing tax relief more fairly and has widespread industry support.”
Meanwhile, Osborne announced widely-expected changes to the state pension. He said the increase in state pension age to 66 would be accelerated, while the basic state pension will be linked to earnings from April 2011.
The chancellor said there would be a ‘new triple lock’ guaranteeing that the state pension would rise by at least 2.5% every year, meaning that “pensioners can save with confidence”.
Every year the rise in the basic state pension will be in line with earnings, prices or a 2.5% increase – whichever is the greater.
“With this coalition government pensioners will have the income to live with dignity in retirement,” Osborne said.