Overhauling pensions – The big story

The Chancellor delivered a major reform on the pension front, one that was completely unexpected and potentially game changing – witness the dramatic fall in some life company share prices.

The main points of a two stage process are:

Initial phase from 27 March 2014

Income drawdown For income drawdown years starting on or after 27 March 2014, the maximum capped withdrawal increases from 120% to 150%  of the HMRC/GAD rate (broadly equivalent to the market annuity rate).  The minimum income requirement (broadly state, annuity or occupational pension) for flexible drawdown falls from £20,000 to £12,000 a year, subject to scheme rules.  With the single basic state pension worth £113.10 a week in 2014/15, that means only a little more than £6,100 of other secure pension will be needed to allow unrestricted withdrawals.

Small pension pots  The rules which allow small pension pots to be commuted for a lump sum are relaxed, making it easier to turn then into cash.  The new overall limit for turning all pension wealth into cash increases from £18,000 to £30,000.

Second phase from 2015/16 onwards

Flexible income drawdown  In effect, the minimum income requirement will disappear, so that from age 55 if you have personal pension or other defined contribution pension (not a final salary scheme), then you can take whatever withdrawals you wish, whenever you want – subject to having the necessary funds available.  The Chancellor presented this as an end to the requirement to buy annuities, although in practice annuities are still likely to have a role to play if you want to guarantee income for life.

Guidance guarantee  The government will require your pension provider to offer “free and impartial face-to-face guidance” when you retire if you are in a pension scheme other than a final salary scheme.  The practicalities of this await clarification, but one aspect is already clear: it will be ‘guidance’ on offer, not advice.  So you will still have to make your own decision or seek professional advice.

There are other changes with a longer term timescale which are subject to consultation, e.g. on the minimum age at which you can take benefits.  If you are close to retirement, it is vital to take advice before making any decisions: the retirement world has been changed by Mr Osborne and your plans will almost certainly need a review.

The value of your investment can go down as well as up and you may not get back the full amount you invested.

25th April 2013