The best of all worlds for your pension?

A revolution starts in 2015 and new, one-year annuities will allow retirees to bridge the gap. Chiara Cavaglieri asks if it's the right option

Only a month after radical reforms were unveiled in the biggest shake-up of British pensions for a generation, one-year versions of fixed-term annuities have hit the market for the first time ever. The stop-gap products will enable retirees to take an income and tax-free cash now, while still being able to rethink their options when the new pension rules come into force next year. But are they worth while?

By far the most dramatic news revealed by Chancellor George Osborne in the Budget was that, with effect from April 2015, savers over 55 will have unlimited access to their pension pots. First LV= and now Just Retirement have been quick to react by offering the first- ever fixed-term annuities that last for just one year.

Stephen Lowe of Just Retirement says: "We are in a time of transition when the retirement income landscape is facing a massive upheaval. We shouldn't forget that many tens of thousands of people will want to retire and most will need to switch on a regular income. Fixed-term annuities are one way of making the transition into retirement while waiting for the dust to settle."

Under the current pension system, retirees typically exchange their entire pension savings for a lifetime annuity that pays out a guaranteed income every year for the rest of their life. This removes all the risk in that they know exactly what they will get year, in, year out. But with annuity rates halving in 15 years, pensioners have been getting a raw deal.

Instead of locking into a fixed income for life, the Just Retirement and LV= products last for 12 months and give you a guaranteed sum back at maturity. You use that sum to invest in a different retirement income product such as a lifetime annuity, income drawdown or even another fixed-term annuity.

Both providers have previously sold fixed-term annuities lasting for three and five years, but the new one-year plan has a clear purpose as an interim measure for retirees who want to wait for the new rules to kick in. With such major changes on the way, a short-term solution could work well if you need a reliable income now, or if you want to bridge the gap between semi and full retirement, without committing to a lifetime annuity or exposing your pension to investment risk.

Kusal Ariyawansa of the adviser Appleton Gerrard says: "As opposed to being locked into a low annuity rate for life when in good health, [people] might chose to work for a few extra years in the hope of securing a better income later, as you tend to get more the older you are. In the meantime, if they can access the tax-free cash to pay down debts, or, enjoy a once-in-a-lifetime event, all the better".

However, drawdown rules can make this more complicated, not least because if you don't take the 25 per cent tax-free lump sum to which you are entitled at the start of the contract, you lose it. Comprehensive financial planning and advice is crucial - the costs of which may be prohibitive on a product that lasts for only one year.

Another drawback is that the timescale leaves no opportunity for a return on your investment, so you may be better off leaving your pension as it is until next April. If you will be getting a lifetime annuity in a year's time anyway, there is also a risk that annuity rates will be even less attractive by then. David Gibson of the adviser Gibson Financial Planning warns: "By the time a client signs up ... and the funds get transferred to the new provider and benefits commence, it could be six weeks - and by then you've only about 10 months until the new rules come into play."

Some people have predicted that the pension revolution will sound the death knell for annuities, but Mr Gibson expects that over the next year or two, new and more flexible products will come on to the market.

In the meantime, parking your pension in an income drawdown plan is another option. Here, you can take a quarter of your pension tax-free, leave the rest invested in the stock market and take an income from investments such as dividend-paying shares, equity income funds, bond funds and property funds.

However, you must be comfortable putting your savings at risk. The big danger is that you run down your pension too early or the stock market performs badly. Lifetime annuities still make a lot of sense if you're cautious and can't stomach any losses, although it's a big move to lock all of your pension money away now if you can take as much as you want, subject to income tax, next year.

If you have a number of small pension pots, some important adjustments have already come into play making it much easier to release money from your pension. If you are over 60 and have less than £30,000 in total, or three individual pots of up to £10,000, you can take the whole lot as cash. The first 25 per cent is tax-free. Previously, you had to have less than £18,000 in total and you could only take up to two small pots worth no more than £2,000 each.

Alternatively, you may actually want to top up your pension if you don't need the money now. Pensions are much more attractive without the restrictions on access: you get tax relief on your contributions and, once you're 55, you only pay income tax on three quarters of your pension money - with no limits as to how and when you take it. If you are reviewing your retirement plans, compare what income an annuity will give you with the growth you need each year in your pension fund to maintain your standard of living.

New rules in place now

As of 27 March, over-60s can cash in their entire pension if it is worth £30,000 or less, and up to three individual pots worth £10,000 or less. The first 25 per cent is tax-free.

The minimum income requirement for flexible drawdown has fallen from £20,000 to just £12,000, giving many more pensioners access to unlimited withdrawals within a drawdown plan.

Big changes next year

From April 2015, you will have unlimited access to your pension from the age of 55. You can take a quarter of this as tax-free cash and the remainder is taxed as income at a rate of 20, 40 or 45 per cent.

There is no longer any requirement to buy an annuity.

The Government is providing £20m over the next two years to fund 15 minutes of free "at retirement" advice.

Arts and Entertainment
filmPoldark production team claims innocence of viewers' ab frenzy
Life and Style
Google marks the 81st anniversary of the Loch Ness Monster's most famous photograph
techIt's the 81st anniversary of THAT iconic photograph
News
Katie Hopkins makes a living out of courting controversy
people
News
General Election
Finacial products from our partners

 

Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Guru Careers: Pricing Analyst

    £30 - 35k (DOE): Guru Careers: We are seeking a Pricing Analyst with experienc...

    Ashdown Group: Treasury Assistant - Accounts Assistant - London, Old Street

    £24000 - £26000 per annum + benefits : Ashdown Group: A highly successful, glo...

    Ashdown Group: Sales Team Leader - Wakefield, West Yorkshire

    £21000 - £24000 per annum: Ashdown Group: The Ashdown Group has been engaged b...

    Ashdown Group: Head of Client Services - City of London, Old Street

    £45000 - £50000 per annum + benefits : Ashdown Group: A highly successful, int...

    Day In a Page

    Revealed: Why Mohammed Emwazi chose the 'safe option' of fighting for Isis, rather than following his friends to al-Shabaab in Somalia

    Why Mohammed Emwazi chose Isis

    His friends were betrayed and killed by al-Shabaab
    'The solution can never be to impassively watch on while desperate people drown'
An open letter to David Cameron: Building fortress Europe has had deadly results

    Open letter to David Cameron

    Building the walls of fortress Europe has had deadly results
    Tory candidates' tweets not as 'spontaneous' as they seem - you don't say!

    You don't say!

    Tory candidates' election tweets not as 'spontaneous' as they appear
    Mubi: Netflix for people who want to stop just watching trash

    So what is Mubi?

    Netflix for people who want to stop just watching trash all the time
    The impossible job: how to follow Kevin Spacey?

    The hardest job in theatre?

    How to follow Kevin Spacey
    Armenian genocide: To continue to deny the truth of this mass human cruelty is close to a criminal lie

    Armenian genocide and the 'good Turks'

    To continue to deny the truth of this mass human cruelty is close to a criminal lie
    Lou Reed: The truth about the singer's upbringing beyond the biographers' and memoirists' myths

    'Lou needed care, but what he got was ECT'

    The truth about the singer's upbringing beyond
    Migrant boat disaster: This human tragedy has been brewing for four years and EU states can't say they were not warned

    This human tragedy has been brewing for years

    EU states can't say they were not warned
    Women's sportswear: From tackling a marathon to a jog in the park, the right kit can help

    Women's sportswear

    From tackling a marathon to a jog in the park, the right kit can help
    Hillary Clinton's outfits will be as important as her policies in her presidential bid

    Clinton's clothes

    Like it or not, her outfits will be as important as her policies
    NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

    Who's monitoring the outsourced NHS services?

    A report finds that private firms are not being properly assessed for their quality of care
    Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

    Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

    The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
    How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

    How do Greeks feel about Syriza?

    Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
    From Iraq to Libya and Syria: The wars that come back to haunt us

    The wars that come back to haunt us

    David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
    Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

    Too busy to surf? Head to The Pool

    A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders