Budget 2014: How to make the most of the pension revolution
Simon Read examines the Budget announcement of the biggest shake-up to the pensions system for almost 100 years to find out how you should react to it
The big news from this week's Budget is the relaxing of the rules that force retiring people to buy an annuity with their pension pot.
The change – which the Chancellor described as "the most far-reaching reform to the taxation of pensions since the regime was introduced in 1921" – will come into effect from July 2015.
But before then the shake-up of the pensions system starts next week with a range of rule changes coming into force from Thursday.
Here, we round up all the main pension rule reforms and who they will affect.
The key message with all the changes is that if you are affected – because you are retiring soon, for instance – get professional advice on your options by talking to your pension provider as well as an independent pension expert.
The long-term rule changes on annuities will mean that all of us who are still in work will be rethinking our pension planning as we have suddenly been handed more flexibility. Again, talking things over with a pension expert is vital to ensure you make the right decisions for your financial future.
What's happening next week?
The key move is that the Government has increased the overall amount of what it calls "pension wealth" that you can take as a lump sum.
At present, under "trivial commutation" rules, if you have less than £18,000 in your private pension pot, the entire amount can be taken as cash and you aren't forced to buy what would be a tiny payout from an annuity. A quarter of it is tax-free, the rest charged at your marginal rate of tax.
The amount will increase to £30,000 from next Thursday. This is the average size of pension pots of those retiring at the moment, and the amount is significant. This means – along with other changes coming into effect on Thursday – that around 400,000 more people will have flexible ways to get at their pension cash in the next tax year.
What are the other changes? At present, if you have a small pension pot – of £2,000 or less – you can take it as a lump sum. If you have more pots – built up at different times in your career – you can take two as a lump sum.
Read more: Reliant Robin is the best most of us can hope for
Lamborghini gaffe shouldn't detract from transference of power
New pension freedom may lead to care fees problem
From Thursday, the number of small pension pots you can take as a lump sum will increase to three. However, much more helpfully, the amount will increase fivefold to £10,000.
That means that if you have three smaller pots worth up to £30,000, you will have the same right to take it as a lump sum as someone with just one larger pension saving of up to £30,000.
Also from Thursday, reforms are coming in relating to drawdown annuities. If you have either a capped drawdown or flexible drawdown arrangement, you can find full details of the changes at gov.uk/government/publications/increasing-pension-flexibility.
What about the annuity freedom?
That's not coming into effect until April 2015. If you are planning to retire before then, it may be worth while delaying your plans until you are given that greater flexibility with your pension cash.
You'll still be able to buy an annuity after April 2015, of course– it's just that you won't have to. However, the proposals are, for the moment, just that. So it makes sense to delay making any decision until after the consultation period for the plans, when the future pensions and annuity landscape will be clearer.
The Government has said that everyone will be given the opportunity to receive free face-to-face advice before making a decision. It has earmarked £20m to pay for the advice but how that will work is yet to be seen.
The new rules will mean that savers will be able to get the entirety of their pension at any time after the age of 55. What is not changing is that you can take a quarter of your pot – up to certain limits – as a tax-free lump sum.
What will change is that you will then be able to take the other three-quarters of your retirement savings and only pay tax at your standard rate, whether that's 20 per cent, 40 per cent or 45 per cent. That will mean, of course, risking paying a higher rate if drawing the cash pushes you into a higher tax bracket.
Being allowed to take your whole pension as one lump sum would mean anyone with a £100,000 pot could take £25,000 tax-free and pay tax on the remaining £75,000 if they withdraw it.
Advice will be crucial. For instance, because of the tax charge it may make sense to delay taking the whole pot in one go to avoid falling into a higher tax bracket. In short, don't make a move until you've checked what effect it will have on your finances.
What about pensioner bonds?
These are savings schemes being introduced from next January. They will be issued by National Savings & Investments with an investment limit of £10,000 each.
Interest rates are yet to be set but the Chancellor promised they would be market-leading. Current estimates are 2.8 per cent for a one-year bond and 4 per cent for a three-year one.
However, the bonds will not be tax-free.
Sales of the tablet are set to fall again, say analysts
Met Police confirm there was a 'minor disturbance' and that no-one was arrested
George Lucas criticises the major Hollywood film studios
Does Chris Grayling realise what a vague concept he is dealing with?
Trend which requires crisps, a fork and a strong stomach is sweeping Mexico's streets
Parties threaten resort's image as a family destination
I Am Bread could actually be a challenging and nuanced title
Mark Dampier: Woodford’s young companies could be the stars of the future
Money Insider: Help to Buy must be boosted by building
Weekly Money: Round-up of the personal finance stories you may have missed 13-17 October
The opera singer, the broadband delay and why customers aren’t divas if they expect a good service
How to start your own internet business
- 1 Indian footballer Peter Biaksangzuala dies after injuring spine doing somersault celebration
- 2 Jack the Ripper: Scientist who claims to have identified notorious killer has 'made serious DNA error'
- 3 Banksy arrest hoax: Internet duped by fake report claiming that the street artist's identity has been revealed
- 4 Drink alcohol and eat meat to improve male fertility - but cut down on coffee, studies suggest
- 5 Brian Harvey turns up at Downing Street and 'demands to speak to Prime Minister'
Cameron is warned 'no possibility' of UK reducing immigration and that bid to bring in quota on migrant workers would be illegal
Residents should throw a street party and mix with immigrant neighbours, councils told
Russell Brand threatened with arrest after filming outside Fox News headquarters
London bus driver allegedly kicks gay couple off for kissing
Amal Alamuddin calls for the return of the Elgin Marbles from Britain: 'Injustice has persisted for too long'
Lord Freud: Tory welfare minister apologises after saying disabled people are 'not worth’ the minimum wage
iJobs Money & Business
£18 - 23k + Benefits: Guru Careers: We are seeking a Customer Service Executiv...
£60 - 65k + Benefits: Guru Careers: We are seeking a ASP.NET Web Developer / ....
£60,000 - £80,000: Saxton Leigh: Our client is an leading Asset Manager based...
£27000 - £32000 Per Annum: Clearwater People Solutions Ltd: Our large charity ...
Day In a Page
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village