Chancellor says: “Let me be clear. Nobody will have to buy an annuity from 2015”
Today the Chancellor, George Osborne dropped a pension bombsell fifty minutes into his annual budget speech, which no doubt will rock the annuity market. Pension savers will be trusted to spend their pension pots in a way that suits their personal circumstances. The new rules announced today will enable pension savers to take their entire pension pot as cash from the age of 55 as of 2015 after the Chancellor lifted lifted punitive restrictions on pots, declaring: ‘Nobody will have to buy an annuity’.
The Chancellor said today that the 13million people with defined contribution pensions should be trusted to make the right decisions with their retirement savings. Under the changes, someone with a £100,000 pension pot could take £85,000 as a lump sum, 25 per cent of it tax free, compared to just £58,750 as it stands now. Currently if consumers wish to take any more as a lump sum they will be hit with a punitive 55 per cent tax charge.
The Chancellor said: “We will completely change the tax treatment of defined contribution pensions to bring it into line with the modern world. There will be consequential implications for defined benefit pensions upon which we will consult and proceed cautiously, so the changes we announce will not today apply to them.”
Osborne continued: “But 13 million people have defined contribution schemes, and the number continues to grow. But most people still have little option but to take out an annuity, even though annuity rates have fallen by a half over the last 15 years. The tax rules around these pensions are a manifestation of a patronising view that pensioners can’t be trusted with their own pension pots.”
Some changes will take effect on 27 March
- Cut the income requirement for flexible drawdown from £20,000 to £12,000
- Raise the capped drawdown limit from 120% to 150%
- Increase the size of the lump sum small pot five-fold to £10,000
- Almost double the total pension savings you can take as a lump sum to £30,000
The government will legislate to remove all remaining tax restrictions on how pensioners have access to their pension pots. Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want, meaning no caps or drawdown limits.
The Chancellor promised to introduce a new guarantee, enforced by law, that everyone who retires on these defined contribution pensions will be offered free, impartial, face-to-face advice on how to get the most from the choices they will now have. Those who still want the certainty of an annuity, as many will, will be able to shop around for the best deal.
I am providing £20 million over the next two years to work with consumer groups and industry to develop this new right to advice.
When it comes to tax charges, it will still be possible to take a quarter of your pension pot tax free on retirement, as today. But instead of the punitive 55% tax that exists now if you try to take the rest, anything else you take out of your pension will simply be taxed at normal marginal tax rates – as with any other income. So not a 55% tax but a 20% tax for most pensioners.
The OBR confirm that in the next fifteen years, as some people use these new freedoms to draw down their pensions, this tax cut will lead to an increase in tax receipts. These major changes to the tax regime require a separate Act of Parliament – and we will have them in place for April next year.
The government will be providing £20 million over the next two years to work with the industry and consumer groups to help develop this new right to free, impartial, face-to-face advice.