Budget 2014: Pension reforms offer freedom to savers

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Chancellor George Osborne delivers his Budget in the Commons on Wednesday

It was a Budget that George Osborne said would have savers at its heart.

The chancellor did not disappoint as he announced the most radical overhaul of the pensions system in nearly a century, with freedom for the pension saver at its core. Removing restrictions which have seen most British pensioners buy an annuity when they retire was hailed as the most far-reaching reform to the taxation of pensions since the regime was introduced in 1921.

Mr Osborne said the reforms, to take effect in April 2015, would allow individuals who have built up a lump sum in a defined contribution, or money purchase, pension to take the funds as cash, draw them down over time, or buy an annuity.

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Savers are currently limited either to exchanging their pension savings for an annuity, which pays an income for life, or keeping their fund invested in drawdown if it is a larger size. There is an option to take small pots of £18,000 or less as cash but very few take advantage of this flexibility, because of complex rules which are not very well promoted by the pensions industry.

Although annuity rates have plummeted, more than 90 per cent of the 400,000 or so savers who retire each year still buy one. Mr Osborne said the new measures meant that no one would have to buy an annuity.

“People who have worked hard and saved hard all their lives, and done the right thing, should be trusted with their own finances,” he said. “And that’s precisely what we will now do. Trust the people.”

The Treasury said the measures would give 320,000 people retiring each year with defined contribution pension pots the freedom to draw down “as much or as little of their pension pot as they want, anytime they want.”

The chancellor said: “No caps. No drawdown limits. Let me be clear. No one will have to buy an annuity.”

People will still be able to take 25 per cent of their pension fund as a tax-free lump sum and more withdrawals will be taxed at the individual’s marginal tax rate, instead of the current 55 per cent which applies to over-withdrawals.

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The pensions industry was stunned by the breadth and timing of the reforms, which came on top of a Financial Conduct Authority investigation into competition concerns in the £12bn-a-year annuities market. The regulator launched a second probe into the market after a 2013 review found that millions of savers were not being “well served”.

Alan Higham, head of retirement insight at Fidelity and chairman of Annuity Direct, said: “The changes will effectively remove the regulatory bias that exists at the moment which means too many people buy annuities at the wrong time and for pretty poor value.”

There were immediate measures to help savers retiring with small pots, many of whom are currently forced to buy annuities. From March 27, individuals with total pension savings of £30,000 or less will be able to take these pots as a cash lump sum – a near doubling of the current £18,000 threshold – and the number of small pots which can be taken as a lump sum will increase.

“The changes he [Osborne] has announced recognise that people’s lives have changed and that savers need to look at all their assets before making a decision on retirement income,” said Dean Mirfin, group director at Key Retirement Solutions.

The chancellor also announced rule changes which will allow investors who have kept their funds invested to access more of their cash.

“There are immediate changes to the flexible drawdown rules, in particular an increase in the capped drawdown limit to 150 per cent of an equivalent annuity, up from the current 120 per cent,” said Patricia Mock, a tax director in the private client services practice at Deloitte.

The government is to consult on its reforms.

The National Association of Pension Funds, which represents workplace pension schemes, said there was a heightened risk that “a number of people will run through their pension pots far too quickly”.

It said: We fear these reforms, without careful scrutiny, will leave a large swath of people vulnerable to poverty in old age.”