Chancellor George Osborne’s 2014 Budget for ‘hardworking people to keep more of what they earn – and more of what they save’ could provoke a seismic change
Drawdown restrictions and the requirement to purchase an annuity will be removed from next April, giving pension savers more choice over how they spend their money in retirement. The message from the chancellor seems clear: you’ve earned it, you’ve saved it, and we (the government) trust you to do the right thing with it. Should pension savers rejoice? How will the changes affect you? Sceptics have suggested that more people will take their pension in cash and blow it on a holiday of a lifetime, rather than convert it into a steady income for the remainder of their lifetime, but is it true, and, more importantly: does it really matter?
Last week the chancellor announced that retirees who have built up a pension pot through a defined contribution scheme will be given greater freedom over what they can do with their pension savings when they retire.
Presently retirees can take up to 25% of their defined contribution pension pot as a tax free lump sum, and have the option to use the rest to purchase an annuity or take income drawdown if their circumstances and pot meets requirements. It’s also often possible to take smaller pots (those up to £18,000) as a lump sum without a tax penalty, but generally withdrawals that fall outside of the rules are taxed at 55%.
Under new rules which will come into play from April next year you will still be able to take a 25% tax free lump sum from your pension pot, purchase an annuity, or take drawdown if you choose to, but the 55% taxation applied to other withdrawals will no longer apply. What this means is that you have a new option to take make additional withdrawals from your fund which will be taxed at the same rate as an equivalent income from an annuity or drawdown would be.
Your pension, your retirement
We’re living longer than ever, state pension age is rising, and State Pension provides a meagre amount each week to see out your days on. That means that what you save into a pension, or elsewhere with retirement in mind, can really make or break your plan for the golden years of your dreams. A lifetime of work goes into your pension pot, no matter how small or large, and the freedom to do with it as you wish upon retirement is now yours.
Your retirement could be longer than you think, and you should consider carefully matching up your desired lifestyle with the sum that you have or are likely to have on retirement. If you're tempted to get your hands on your pension pot as soon as possible, why not take a moment to consider how this could impact your income over the next ten, twenty, thirty years?
Zoom in on your lifestyle
Annuity providers may assess your lifestyle and health to estimate how long you’ll live for. You may want to do the same informally to consider how much income you’d need each year. Be wary of underestimating your life expectancy - the State Pension is roughly £7,000 per year. While this has been described as ‘generous’, in reality the State Pension is less than most people earn annually whilst working, you won't be able to recieve the income until you're in your mid to late 60s. You may not even be eligible for the full amount, which depends on a number of factors. Check out our guide to state pensions to find out more.
If you don't have a pension already, or you haven't checked in on your pension for a while, you may want to check out the YourWealth guide to pensions to get you started.
Pension changes: Your choice
The changes to pensions announced last week may give you more choice, but with that choice comes responsibility to choose wisely for your needs and circumstances. Consider what you’d like to do with your retirement. Are you hoping to maintain your current level of lifestyle, have regular holidays, or simply be able to financially help out any relatives? Working out how much you might need per year could give you an idea of whether you’re on track to sufficiently fill your pension pot. Our Money Hub tool can help you to track your pension contributions against your desired income, estimate your income at different retirement ages, and show estimated savings and investments for retirement.